Private business owners have surely heard the term “SPAC” a lot over the last few years. For professional advisors and non-transaction lawyers, the term may be ubiquitous, but still somewhat of a mystery. They may be wondering, what is a SPAC, why are so many people talking about them, and do they have anything to do with me or my clients?
A SPAC is a special purpose acquisition company, or a “blank check” shell company. Great, what does that mean? The easiest way to think of a SPAC is that it is a method for a private company to go public without having to go through an Initial Public Offering (“IPO”). The SPAC has already gone through an IPO. It is a vehicle that raises money through an IPO for the purpose of making an acquisition of a private company. The SPAC is money in search of a venture.
SPACs have been around since 1990 but have really only gone through a few periods since then where they were particularly in fashion as an acquisition vehicle. SPACs increased in popularity over the last few years, with numerous athletes and celebrities like Serena Williams and Leonardo Decaprio associating themselves with SPACs and hedge fund managers and other investment luminaries acting as SPAC sponsors. Investors are willing to put money into SPACs based on their belief in the investment acumen of its management team or the coolness factor of its other prominent investors. Where SPAC formation had been fairly dormant in the prior decade, SPAC investment boomed in 2020, raising $83 billion and accounting for more than half of all IPOs.
What does this mean for business owners and the advisors that represent them? SPACs have a predetermined time period in which the SPAC must complete a merger or acquisition, usually two years or less. This means that much of the capital raised through SPACs in 2020 needs to be deployed this year. This is additional capital that is looking for acquisitions in addition to the trillions of dollars of dry powder held by private equity and the cash on the balance sheets of public companies in search of acquisitions.
This is important for private companies considering going public through an IPO. Acquisition through a SPAC gives private companies access to capital and access to operational and management expertise, without much of the time and expense associated with an IPO. Obviously, going public through a SPAC transaction is not the right strategy for every private company, but it now an additional plan that may be considered for the right company.