SPACs, or Special Purpose Acquisition Companies, are the subject of much discussion these days in boardrooms, on Wall Street, and in the press, for good reason.
Many investment managers, wealth management specialists, private bankers, and financial advisors see the opportunities in a SPAC, much like they would in an initial public offering or IPO.
In this article, we will discuss how you as an investor can utilize the services of wealth management specialists to take advantage of SPACs and what they offer to grow your portfolio and increase your wealth.
What are SPACs?
Made for the sole purpose of achieving a merger or “combination” with a privately held business to enable it to become public, a Special Purpose Acquisition Company (SPAC) is a publicly traded corporation with a two-year life span.
While special purpose acquisition companies (SPACs) have existed in some form for decades, their popularity in the United States has skyrocketed over the past two years.
There were 59 SPACs recorded in 2019, resulting in around $13 billion was invested; 247 in 2020 with $80 billion; and 295 in just the first quarter of 2021 with $96 billion.
By 2020, more than half of all newly public U.S. corporations were SPACs.
The primary source of funding for SPACs is public-equity investors, and the structure has the ability to reduce a company’s exposure to risk and speed up the IPO process, all while providing the company with more favorable conditions.
SPACs provide an alternative source of funding for investors and targets, challenging later-stage venture capitalist, private equity, direct listings, and the traditional IPO routes. They also inject funds into more businesses generally, fostering new ideas and expansion.
Many businesses have been able to raise more money through SPACs than through any other means, fueling innovation across various sectors.
The majority of SPACs today invest in businesses that are shaking up the consumer goods, IT, or biotech industries. Several of these businesses are highly risky, need massive upfront funding, and provide few guarantees of success in the near future.
Because of this, SPACs have helped numerous companies (including those in the electric car industry) secure more capital than they otherwise could have, fostering innovation across a wide variety of sectors.
SPACs are also great for investors as they allow them to get a piece of a growing company without having to go through the public scrutiny that comes with an IPO.
SPACs also give startups more control over their growth than they would have if they did an IPO right away.
Who are involved in a SPAC?
Sponsors, investors, and intended beneficiaries are the three main groups involved in SPACs, each with their own concerns, requirements, and points of view.
The SPAC process is initiated by the sponsors. Risk capital is provided by the retainer fees paid to bankers, lawyers, and accountants to fund their operations.
The SPAC must be dissolved and investor funds returned if the sponsors are unable to form a combination or merger within two years.
Not only do the backers waste their time and effort, but they also lose the risk capital they put into the project. However, the sponsors will contribute equity to the new company equal to up to 20% of the total capital raised if the merger goes through.
For an example, let’s say an initial $6–$8 million is put into a SPAC by its sponsor to cover overhead expenses like underwriting, legal, and due diligence work for an intended $250 million in capital.
In order to put the plan into action, the SPAC offers 25,000,000 shares to investors at a price of $10.00 each. Also, the sponsor purchases 6.25 million shares, or 20% of the total outstanding shares, at a minimal price.
If the sponsors are able to pull off a merger within two years, the founders’ shares will vest at $10 a share, giving them a $62.5 million interest.
Keep in mind that sponsors may only reap these benefits if they create a compelling proposal, attract investors, locate a promising target, and persuade the target of the financial and strategic merits of a corporate combination.
Sponsors need to steer the target and the SPAC through the intricate merger procedure without losing investors while negotiating competitive acquisition terms.
This is an ambitious goal. With so many SPACs on the market, competition for targets and investors is fierce, increasing the danger that a sponsor would lose the money it risked and the time it spent on the deal.
Startups that have already received venture funding are the typical targets of SPACs.
Businesses at this juncture often weigh a number of potential next steps, including an initial public offering, direct IPO listing, sale to another company or private equity firm, or capital raise from investors like PE companies, hedge funds, and other institutional investors.
SPACs serve as an appealing substitute to these choices as they are adaptable to different needs and work with a wide range of variables.
Sponsors may utilize the structure to roll up several targets, even though targets are typically a single private firm. For instance, companies that are currently publicly traded in other countries may be taken public in the United States through SPACs.
Institutional investors, typically highly specialized hedge funds, have made the vast bulk of SPAC investments.
Investors in a SPAC’s IPO must put their faith in the company’s sponsors, who are not required to stick to the size, valuation, industry, or geographic criteria they established in the offering’s initial public offering paperwork.
Investors acquire both common stock (at a typical price of $10 per share) and warrants to purchase additional shares at a later date and for a higher price (usually $11.50 per share).
The risk-alignment arrangement between SPAC sponsors and investors relies heavily on warrants. For every share of common stock purchased, a warrant may be issued by some SPACs, whereas no warrants may be issued by others.
The bigger the amount of warrants issued, the greater the perceived risk of the SPAC because warrants allow significant upside to early investors.
Investors have the option of continuing with the offer after hearing that the sponsor has reached an agreement with the target, or pulling out and getting their money back plus interest.
This way they can preserve their warrants even if they opt to withdraw. They can evaluate an investment in a private company through the SPAC without taking any financial risks.
Even if they are interested in the business merger enacted by the SPAC, not all SPAC investors are chasing sky-high returns.
When looking into a merger, some investors exploit the structure on a leveraged basis to earn a guaranteed return through interest on invested income and the selling of warrants, often at a greater yield than Treasury and AAA corporate bonds offer.
Because of the structure’s intricacy, investors can tailor their risk, return, and time horizon expectations. The complexity is a common reason why only seasoned investors and experienced wealth management specialists deal with SPACs.
Why should you invest in a SPAC?
While most companies want their own identity and independence from outside investors, some find themselves needing capital in order to grow at an accelerated rate–and this is where SPACs come into play.
Effective SPACs benefit all parties involved by providing attractive capital-raising processes for targets, suitable risk-adjusted returns for investors, and profit opportunities for SPAC sponsors.
A SPAC is more likely to successfully negotiate terms that are agreeable to all parties in a merger or acquisition if the value creation potential is high.
Most companies want to grow large enough that they do not need to rely the funds raised by SPACs, but smaller companies prefer it because they can keep control over their growth through the confidential process.
SPACs also allow investors to get in on the ground floor of a company that may grow into something big.
Value was initially created by sponsors who took on financial risk and won over public equity investors.
SPAC sponsors are increasingly looking for PIPE (private investment in public equity) investments from a diverse set of institutional investors to reassure these constituents (mutual funds, family offices, private equity companies, pension funds, strategic investors).
Thanks to these investments, shareholders of the merged company can raise capital to buy shares. Sponsors use PIPEs to validate their investment analysis while also increasing funding and decreasing the dilution impact of sponsor stock and warrants (PIPE interest reflects a vote of confidence).
They also serve as a way to guarantee a minimum amount of cash investment in the event that the initial investors decide to pull out of the contract.
PIPE investors put up cash and are willing to have it locked up for a minimum of six months. This is because they have faith in the investment opportunity, expect the merged business to be lightly traded, and are being offered subscription fees that are below market value.
Keep note that the sponsor of a SPAC needs a capable crew to see it through from inception to merger.
Sponsors, like private equity companies, often hire operations executives with the knowledge and influence to persuade targets of the value of a merger or acquisition. They look for potential board members with strong networks and proven expertise in executive leadership and strategic planning.
Complex and time-sensitive, SPAC transactions are difficult to pull off successfully. Expertise in operational and legal due diligence, securities legislation, executive remuneration, hiring, negotiation, and investor relations is essential for SPAC teams.
While it is possible to outsource certain aspects of these processes, most sponsors prefer to have an in-house expert oversee everything. Inviting merger talks with more desirable targets and attracting skilled long-term investors on favorable terms are both facilitated by a SPAC’s ability to construct a solid team.
It is common practice for SPACs to highlight such tangible benefits in their initial public offerings (IPOs) when they exist. The deal’s execution method is just as important to high-quality targets as the price itself.
How can wealth management specialists help you as an investor take advantage of SPACs?
SPACs have many benefits over other methods of financing and selling shares for the companies being acquired.
When compared to a standard IPO, SPACs have many advantages, including higher valuations, less dilution, quicker access to financing, greater certainty and transparency, lower fees, and fewer regulatory obligations.
Even if they are interested in the merger, not all SPAC investors are chasing sky-high returns. The framework is adaptable to accommodate a wide range of risk tolerances and time horizons.
Of course, novice investors should not engage in risky speculation, but experienced analysts, financial advisors, and wealth management specialists can identify promising investing opportunities for them.
In this way, wealth management specialists are well-equipped to advise clients on investing in SPACs.
Wealth managers and financial planners can help you find new SPACs, and they can also help you understand the risks of investing in a SPAC and how to mitigate those risks.
In contrast to the nine-to-twelve-month time frame often associated with traditional IPOs, the entire SPAC process can be completed in as little as three to five months for targets, with the value determined in the first month.
This means that it will be harder for less-than-dedicated investors to keep track of updates and news about SPACs. That is where advisors can come in. Moreover, experienced wealth managers can also advise what to do during the more complicated processes of investing in SPACs.
Again, SPACs can provide more generous valuations than standard IPOs. The target and the other SPAC participants arrange a capital commitment and a binding valuation some months before the merger (although the valuation is subject to approval by PIPE investors).
In contrast, underwriters play a more active role in traditional IPOs, in which investors are directly solicited and managed, leaving the valuation process mainly in the hands of the target.
SPACs also have the added benefit of often achieving greater values than IPOs do, for a number of reasons.
To begin with, the relationship between an underwriter and a company seeking to go public is purely transactional, while the relationship between a company and its regular investors is ongoing. There is now a potential for bias because of this.
The underwriters have considerable discretion in allocating shares, and they frequently do so as a gesture of gratitude to their most valuable clients. Undercharging in the beginning ensures the highest possible profit for both the seller and the buyer.
Due to this, there are implications for the intended recipient that you should keep in mind.
In 2020, the average value increase of a company after its initial public offering (IPO) was 92% in the first 90 days. That may sound like a huge success, but the fact that the companies have done so well after their IPOs shows that they may have raised too little money at too low of a price.
The companies left money on the table by not optimizing their balance sheets and total dilution, which was likely taken by IPO bankers and their customers.
Your sights should be set squarely on the sponsor’s capacity for closing deals and raising funds. You need to look closely at the team’s legal advisors, bankers, and IPO-readiness advisors to ensure they have the skills and experience to get the job done in such a short amount of time.
Additionally, sponsors should be questioned on their investment theses and the reasoning for the suggested valuation.
You need to assess the group’s capacity to carry out the back-end tasks that are essential for a successful transition to a public offering, such as raising the capital, handling the regulatory process, securing shareholder approvals, and developing an engaging public relations story.
Last, it’s important for targets to keep in mind that sponsors typically don’t have very much time to finish a combination.
This is more relevant if you are a stakeholder in the target being acquired. Because of this, your organization will be more appealing and put you in a stronger negotiation position if you can show that your financial records are in accordance with the requirements set forth by the Public Company Accounting Oversight Board.
A reasonable negotiating strategy requires consideration of the opposing party’s expected moves. In the SPAC ecosystem, where many different players are involved, this is especially true.
If you look at it as a simple two-party transaction, you’ll notice that the target has a lot of leverage, especially toward the end of the 24-month period, when the sponsor has the most to lose.
But, the math changes when the initial investors are taken into account; they have the option to back out of arrangements even after they’ve been made public. Deals that have unreasonable terms that benefit targets are unlikely to make it through the PIPE process or to avoid substantial investor redemptions.
As a result, sponsors must bargain for a combination that not only makes the target more valuable than its alternatives, but also appeals to the investors. Targets may be in talks with more than one SPAC, at least at the outset of negotiations, adding another layer of complexity.
A SPAC merger agreement, like any other complex transaction, offers nearly infinite room for personalization.
Everyone should know what they want, what’s important to them, and where they can meet in the middle before entering into negotiations.
Sponsors care about both their share price and their reputation, which might have an impact on their capacity to launch new SPACs, so keep that in mind if you’re an investor or a potential target.
And if you’re a sponsor or an investor, you should know that targets have to weigh the value they can earn from the SPAC team, from dilution, from the deal’s execution, and even post-merger.
Cash available for operations, publicity upon going public, derisking, shareholder liquidity, market conditions, and competition are only some of the additional aspects that targets must take into account during negotiations.
SPACs will be around for long time, and their benefits could be substantial to you as an investor. Like with any form of capital raising, some SPACs will fail, perhaps catastrophically, and some participants will act unethically.
Yet, SPACs are now a much more viable investment opportunity than they were in the 1990s or even a year or two ago. Everyone involved in the SPAC process needs to be aware of and prepared for the upcoming changes in regulation and the markets. The market can change very quickly.
Wealth management specialists and financial advisors are experts in their field. They have a lot of experience and knowledge, which means they know how to make you money and handle your investments safely and securely.
A wealth manager will help you invest wisely, so that when the time comes for an exit strategy, it’s as smooth as possible. They can help you find the right SPACs to invest in. They will also be able to advise you on the risks and rewards associated with investing in SPACs.
Finally, they’ll ensure that all of the investments within your portfolio are diversified enough so that no one investment causes undue risk or volatility while still providing substantial returns.
Wealth management specialists are well-equipped to advise clients on investing in SPACs. With their expertise and knowledge of the industry, they can help you invest in SPACs without the investment bank fees and without the risk of losing money.
SPACs are an excellent way for investors to participate in the private equity market. They offer access to high-quality assets, liquidity and transparency. Wealth managers can help you take advantage of SPACs by providing advice on how to invest in existing ones as well as new ones that are being launched.