If you work in the financial sector, you are privy to many a term that to the layman might sound like a foreign language, and in some cases, even the most robust investor can need a hand deciphering some of the terminologies. This may certainly be the case with the term SPAC, which translates to a special purpose acquisition company, in other words, a company with no commercial operations that are formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company.
Michael Naylor, during the IPBN’s Sustainability Conference in which he was a keynote speaker on investments in green initiatives, took the time to give attendees the two-minute version of just what a SPAC is. He said, “[the SPAC] to our European members, is also known as a good old fashioned cash shell, a reverse take over, or, in America, a blank check company and they’ve been around for a long time. They’ve always been seen as subprime but in recent years, they've become more popular.”
(For Naylor's description of SPAC, please start the video at the 24-minute mark.)
Naylor described how one of the founders of Uber saw the opportunity in SPACs and other entrepreneurs followed suit because, as Naylor put it, “people don’t want established players, they want innovation. They want growth,” which is when the SPAC came into play as a way of raising money to find the privately held innovative companies, merge with them, and then through that process, list them on the stock exchanges in New York. That’s essentially what a SPAC does.”
Naylor went on to say that in 1996, he made his first investment in the NYSE. At that time there were 7,200 listed companies to choose from. Now, many of them have been de-listed or have been bought up predominantly by private equity as there are just under 3,500. Naylor explained, "264 SPACs raised 79/80 billion dollars which is more than the entire number of SPACs raised in 2020. It's a multiple of about 6 to 7 times. There's about 700 billion dollars of acquisition capital sitting ready to go in New York this afternoon which has to be deployed in the next year, or you're timed out. We're pirate buccaneers. It's the south sea bubble all over again!"
“For the hedge funds, this is very interesting because they could put money into a SPAC and they won’t lose their capital. The retail investor can participate once it has been listed. You’re either a promoter…with real money at risk, or you’re an investor in the IPO, and those tickets tend to be quite large. You can’t buy $100,000 of a SPAC IPO, it’s a much more significant commitment of capital….and then, once you merge and list, it’s open to the retail market.”
SPACs are raising a record amount of IPO money, according to investopedia.com. In the first six months of 2020 more than 50 SPACs had already been formed in the U.S. raising some $21.5 billion. That speed doubled by year-end.
In the U.K., according to the Financial Times, “there has already been a record investment of close to $8bn in UK start-ups… Now, blank-cheque companies have just surpassed the fundraising they achieved in the whole of last year. SPACs have raised $79.4bn globally since the start of the year, eclipsing the $79.3bn that flooded into vehicles in 2020, according to data provider Refinitiv. So far in 2021, 264 new SPACs have been launched, overtaking last year’s record 256.”
Naylor said he has learned enough about SPACs to launch his own, around the theme of energy, which he will be looking to put on the market by early May. Stay tuned— this could be your chance to be a pirate for the planet!