Special Purpose Acquisition Companies came to real prominence in the US in 2020, sparking a trend that has is now being replicated in the UK and other leading markets around the world. According to EY, the first three quarters of 2021 saw 468 SPAC transactions globally, representing a threefold rise on the prior year. So, what are SPACs, as they are widely known, and why are they becoming more and more popular?
SPACs, one of the more exotic types of alternative investment, are vehicles which list or “float” on stock exchanges for the sole purpose of raising money and making an acquisition, rather than having commercial operations of their own. Investors, who range from private equity companies through to wealthy individuals, do not know which company they will eventually be invested in. For this reason, they are also dubbed “blank cheque” vehicles.
The rise of SPACs forms part of a surge towards alternatives that, while it may be strongest among the Ultra High Net Worth, is certainly trickling down into the High Net Worth Space – off the back of years of rock-bottom interest rates and now unattractive yields from many former mainstay fixed income assets. Average alternatives allocations have gone up many times over the past decade, to the point to which wealth managers say UHNW families are often wholly in alternatives today.
The rewards for investing in a SPAC that finds the right company to acquire can clearly be great, but the risks around these vehicles need to be understood. Firstly, there is no guarantee the right acquisition target will be found within the (UK’s) two-year time limit, in which case funds have to be returned. And, even if they do, dealing in the SPAC has to be suspended once an acquisition target is found which means investors’ money is tied up for some months (The Financial Conduct Authority is reviewing its rules, however, to make the UK more competitive).
For companies looking for investors, SPACs can be highly attractive due to lower costs and faster timeframes than with traditional Initial Public Offerings. This means SPACs are often interested highly competitive and lucrative sectors like AI, biotech and greentech. Investors do need to be able to understand the highly complex structure of these very complex vehicles well along with their true risk-return profile, both of which call for special expertise.