SPACs, the new trend to go public in the US
The US market has awakened with great momentum in this final period of the year. Several IPOs have once again rattled Wall Street, making September the busiest month in terms of number of offerings since 1999.
As usual, large technology companies have been at the center of the most important operations, with Snowflake at the top, making the best debut of the year. They are generally companies with a good business track record and well-defined business models that go public in the traditional way.
As an alternative to the traditional method, Special Purpose Acquisition Companies (SPACs) have become popular. These are instrumental companies without operations or activity that are created with the goal of raising capital through an IPO. They go on to purchase an existing company or merge with it.
Due to their business model, they are also known as “blank check companies”: the investor contributes his money without knowing any details about the company to be purchased in the future (with the exception of large investors, that usually have certain confidential information). This merger or acquisition must be completed within a specified period of time (usually two years). If it does not take place, the SPAC is dissolved and the shareholders get their money back.
SPACs have become very popular and their figures speak for themselves: 80 SPACs have raised more than 32,000 million dollars in the third quarter of 2020, a record number. The graph below shows that the amount almost quadrupled in the second quarter.
Source: SPAC Research
Without a doubt, they have become a very interesting alternative for companies that plan to go public. It is a very fast and efficient way to enter the market avoiding all the obstacles and regulations required by the traditional method. But this simplicity also brings more risks for investors. With this model, companies do not pass the same checks and evaluations as the rest of the companies on the exchange.
But what are the advantages of SPACs?
- For investors: it provides access to venture capital operations that are usually out of reach of retail investors.
- For companies: Quick listing, increased liquidity and increased value of the company.
- For managers: they may get a percentage of the company that can reach up to 20%.
In conclusion, it is a complex financial product that is not suitable for all types of investors, but it provides extra investment opportunities for the IPOs market. We will see how European markets respond to this US trend in the coming months.