Special purpose acquisition companies (Spacs) are emerging as a popular initial public offering (IPO) alternative, providing start-ups with a path to going public with less regulatory scrutiny.
A measure of the popularity of Spacs, also known as "blank cheque" companies, can be gauged from the fact that global blank cheque deal volumes - or mergers through Spacs - surged to a record US$170 billion (S$227.3 billion) by March 9 this year, already outstripping last year's total of US$157 billion, Refinitiv data showed.
Here is what you need to know about Spacs:
1 WHAT IS A SPAC?
A Spac is a shell company that raises funds to acquire a private company with the purpose of taking it public, allowing such targets to sidestep a traditional IPO.
Spacs have gained in popularity in recent months, with investors increasingly looking to growth stocks for higher returns, and as the coronavirus pandemic disrupted the traditional IPO process.
In essence, a Spac is a way to do an IPO without all the time, expense and regulatory oversight traditionally required.
2 WHY ARE THEY POPULAR?
The popularity of Spacs is tied to cases where investors have made handsome gains following Spac acquisitions in the United States.
The popularity of Spacs has seen celebrities, athletes and even former US house speaker Paul Ryan jump on the bandwagon. Other notable investors that have launched Spacs include serial entrepreneur and billionaire Richard Branson and former BuzzFeed chairman Ken Lerer.
Given that Spacs are shell companies that do not make anything or own any assets, the founders themselves are often the main draw, with investors in essence making a bet that their stature and connections will be enough to close a deal with a hot start-up and eventually take it public.
3 WHY ARE THEY CONTROVERSIAL?
Studies show that the majority of Spac acquisitions have not delivered positive returns for retail investors, especially those who do not, or cannot, redeem their shares in Spacs.
Investors are also, in effect, subsidising the sponsors of the Spac, who get to own 20 per cent of the target company.
The stock price of the company bought by the sponsors would have to do extremely well for investors to make money, but the sponsors stand to benefit even if the stock price disappoints.
Spac deals also involve less rigorous due diligence of companies than regular IPOs.
The US Securities and Exchange Commission has also issued an investor alert about the dangers of investing in Spacs based on celebrities associated with them.
4 WHAT ARE SOME BIG-TICKET SPAC DEALS SO FAR?
Singapore-based Grab is set to nab the record for biggest deal in the Spac world and list on US exchanges through a reverse merger with Altimeter Growth in a deal valued at nearly US$40 billion.
Prior to this deal, the largest Spac deal was announced in February between Lucid Motors and Churchill Capital IV, and was valued at US$24 billion.
The third-largest deal was inked by billionaire Alec Gores' Spac with United Wholesale Mortgage Group and valued at US$16 billion.
As at Monday, the biggest companies to emerge from Spacs based on market capitalisation were DraftKings at about US$23 billion, Opendoor Technologies at US$11 billion and Paysafe at around US$9 billion.
Overall, the size of Spac mergers appears to be on the rise, with the average value of deals in the first quarter of this year pegged at US$2.3 billion compared with US$900 million in the corresponding quarter of last year and US$800 million in the first quarter of 2019.
REUTERS, BLOOMBERG, NYTIMES
