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Special purpose acquisition companies are not a new concept in the business world, but they have surged in popularity in recent years. Investors or sponsors typically form these companies with a particular interest in a specific sector, and they focus on acquisition deals within that space.
The beginning of renewed interest in SPACs started in 2020. From 2020 through the end of 2021, SPACs raised nearly $246 billion compared to the $3.5 billion raised in 2016 and $13.6 billion raised in 2019.
These types of companies operate differently than traditional businesses or investment funds and have their own unique advantages and challenges. However, they can be an excellent avenue for startup leaders to pursue when looking to grow their companies by going public.
A SPAC has no actual product or service. Its only goal is to raise funds through an initial public offering and then use that money to complete mergers or acquisitions of promising companies in its chosen sector. SPACs are restricted to a two-year time frame in which to complete these deals; otherwise, the capital they raised is liquidated back to investors at $10 per share.
One important thing to remember is that SPACs may be formed with the intent to acquire a particular company. However, they will not announce their intentions so that it doesn't interfere with the disclosure portion of the IPO process.
Signing a deal with a SPAC can be a positive step for sponsors and private companies considering going public. Not only do sponsors gain access to companies with significant growth potential, but these private companies can get the potential advantages that come with closing a SPAC deal.
One valuable aspect of SPACs is they allow for much faster execution than traditional IPOs. In my experience, an IPO can take anywhere from 12 to 18 months. In contrast, SPAC mergers typically only take up to six months. This kind of agility is ideal for sponsors and private companies.
Initial public offerings are wholly dependent on market conditions at the time of listing, which can create a certain amount of volatility. A sharp change in the market right before a scheduled IPO can also hurt a company's overall strategy.
With SPACs, the pricing is negotiated before the transaction is closed. The certainty and finality of this can be highly advantageous, especially when the market is volatile or uncertain.
An interesting part of SPAC sponsorship is that a SPAC can raise debt or private equity investment in public equity (also known as PIPE) funding in addition to the original amount of capital raised. This can be used not only to fund the current transaction but also to fuel the future growth of the combined company, giving it more funds to work with in the immediate term.
Access to this kind of backstop debt and equity is designed to ensure the transaction is able to be completed, even if some portion of the SPAC investors decide to redeem their shares.
One of the biggest problems startups typically encounter is catching the right investors' attention. While it is possible to get significant investments through excellent PR or timely news publications, the fact remains that most new companies are at the mercy of investor attention.
With SPAC mergers, businesses can bypass this uncertainty. There is no urgent need to generate interest from investors in public exchanges to complete a deal. The only exception to this is if sponsors choose to raise PIPE funding, which requires targeted roadshows to grab the attention of particular types of investors.
Overall, this saves time, money and resources on a company's marketing strategy, which is incredibly valuable.
In the same way that angel investors have recently become more highly valued for the skills and nonfinancial assets they bring to the table, SPAC sponsors are often in the same value category.
Generally speaking, SPAC sponsors usually have extensive experience as financial and industrial professionals. They also tend to have a broad network of contacts who can offer management expertise or even take on a role as a member of the board when appropriate. Access to this deep well of knowledge and veterans willing to step in and assist are invaluable resources.
The truth is that, despite the recent increase in popularity, there's no guarantee that SPACs will remain in favor. There is always a chance that the SPAC cannot find an appropriate acquisition target within the given time or if the target company is uninterested in a merger or acquisition.
Additionally, even if a deal moves forward, it may ultimately be vetoed by shareholders or regulatory bodies, which can complicate the process further.
There have also been fewer SPACs recently because of tightening oversight and concerns over fraud due to the unprecedented spike in popularity that happened during the pandemic.
Overall, SPACs are investment vehicles that can provide numerous advantages to private companies as well as the sponsors involved, but they have yet to gain the sustained traction of traditional IPOs.
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