Markets

What's a SPAC?

David Kimberley

July 30, 2020

Virgin Galactic made headlines around the world last year when it went public on the New York Stock Exchange.


For much of the press, this was another chance to gawp at Richard Branson as he walked around in an Under Armour spacesuit. 


For Freetraders, who have made Virgin Galactic the sixth most popular US stock on the app in the past couple of months, it was another opportunity to invest.


But finance geeks were interested in the listing for a different reason.


The SPACs are coming


Virgin Galactic didn’t hold a traditional IPO. 


Instead, it received $800 million from a special purpose acquisition company (‘SPAC’ for short) and then merged with this ‘shell company’ so that its shares could be traded.


This isn’t remarkable in itself, but SPACs have skyrocketed (excuse the pun…) in popularity over the past couple of years. 


In 2013, 10 SPACs listed in the US and raised $1.4 billion. So far in 2020, 50 of them have listed in the US and they’ve raised $19 billion.



Source: SPAC Research

Wait….what’s a SPAC?

SPACs are companies that are set up with the goal of raising money via an IPO and then using that cash to acquire another business. 


Since they only exist to do a deal or deals, SPACs are also referred to as ‘blank cheque companies’.


In general, a SPAC is set up by a management team that has good knowledge of a specific industry. They’ll use that expertise to make a decision as to where they should invest once they have raised funds via an IPO.


Typically, when a SPAC IPOs, it issues ‘units’ for $10.00 each. These units normally contain a common stock element and an out-of-the money warrant that gives the holder the right to buy more shares in the future. After IPO, the shares and warrants are traded separately. 

Bill Ackman? More like Bill SPACman...amirite?


SPAC investors are not told what business their funds will be put into. For regulatory reasons, this is done even if the founders do know what business they’ll be acquiring. 


Some big names in investing have launched SPACs over the last few years. 


These include activist investors Bill Ackman and Dan Loeb, and lesser-known investment bankers, such as Michael Klein, who’s rallied former execs from Apple, Goldman Sachs, and Ford to head up his company.

De-SPACing

Once they have raised funds, SPAC executives have a set period of time — generally two years — in which they must acquire another business.


If they have not acquired a company at the end of that time frame then they must return the funds they have raised to their shareholders.

 

The process by which a SPAC invests and then merges with another business is known as ‘de-SPACing’ or a ‘de-SPAC transaction’.


While this process should be straightforward, difficulties can arise. Take hedge fund manager, Dan Loeb’s Far Point as an example. It offered $1.9 billion for duty-free shopping payments firm Global Blue in January of this year before global air travel was grounded. Far Point’s management team is now encouraging investors to vote against this deal, however, it may be too little too late.


If all goes to plan, once a de-SPAC transaction has been completed, it’s common for the SPAC to change its name.


For example, the SPAC that invested in Virgin Galactic was called Social Capital Hedosophia. Once it completed that acquisition, it changed its name to Virgin Galactic Holdings.

What’s the point in SPACs?

SPACs have been around since the late 1980s, so there’s been a long debate about the structure and its benefits.


For finance professionals with an established track-record, a SPAC can be a relatively straightforward way to raise significant capital without relying on the tiresome processes of private market fundraising. 


SPACs are also exchange-traded which makes it easier to sell shares in them - it’s generally more difficult and expensive to sell a stake in a private equity fund.


For a company being acquired by a SPAC, there are also a couple of positives.


A firm that wants to go the normal route to IPO will have to go through a series of long, expensive, regulatory processes. At the end of exhaustive meetings with investors, there is still no guarantee on the amount of money the company will receive. 


Merging with a SPAC essentially lets a company leapfrog this process; a company gets certainty when the deal is signed that they will receive $X cash in exchange for a Y% stake in their business. And that business will be publicly traded after it’s all done!


SPACs on Freetrade

There are currently four SPAC shares on Freetrade.


Two of these were launched by Social Capital — the firm that invested in Virgin Galactic. 


Both plan on acquiring tech businesses, with one focused on the US and the other looking to invest outside of the US.


Next is Spartan Energy. This SPAC has already confirmed plans to merge with Fisker, an electric carmaker.


The other SPAC on Freetrade is Tortoise Acquisition


This firm is in the process of completing a de-SPAC transaction as it plans on merging with Hyliion, a firm that makes batteries and trucks which run on renewable energy.


If you are considering investing in a SPAC then remember that they do carry certain risks with them. 


Unless the de-SPAC transaction is in progress, you don’t know what business is going to be invested in or the commensurate risk that this business will carry. 


You also don’t know if the SPAC will be successful in completing an investment within the time period. 


Deal making tends to follow the economic cycle - for example, during the financial crisis in the late 2000s, SPACs found it difficult to find deals and investors’ appetite fell away, leading several SPACs to liquidate. 


This relationship with deal-making means SPAC share prices can be particularly volatile.


This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.


When you invest, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.


Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).


More from

Markets

Markets

Why is gold trading at record highs?

Trade wars, a recession and out of control money printers are pushing investors towards the precious metal

7/8/2020

|

David Kimberley

Markets

Big tech monopolies

Amazon, Apple, Google and Facebook are getting grilled by US politicians

6/8/2020

|

David Kimberley

Markets

Are Tesla shares too expensive?

Tesla has been the Kanye West of the stock market in 2020.

3/8/2020

|

David Kimberley

Markets

The car wash that brought down a president

And the oil company that scandalised a nation

28/7/2020

|

David Kimberley

Markets

The app that made £60m selling stickers

LINE — it's big in Japan

21/7/2020

|

David Kimberley

Markets

Making clothes with Ma Boyle

The woman behind Columbia Sportswear was one tough cookie

14/7/2020

|

David Kimberley

Markets

Smashing bricks on Bilibili

It's like YouTube (but with more anime)

9/7/2020

|

David Kimberley

Markets

How Wetherspoon became a British favourite

The chain has grown from a single pub in 1979 to almost 900 today

3/7/2020

|

David Kimberley

Markets

The growing green investment movement

Freetraders have been putting serious money into green companies

3/7/2020

|

David Kimberley

Markets

e.l.f. and the big business of beauty

A deep dive into the world of cheap beauty products

7/7/2020

|

David Kimberley

Markets

The story of Canadian National Railway

Bill Gates' favourite train company

26/6/2020

|

David Kimberley

Markets

Why do investors buy government bonds?

The promise of guaranteed income attracts investors in times of volatility

26/6/2020

|

David Kimberley

Markets

GW Pharma, pot doctors

We take a look at the UK's most famous medical marijuana company

26/6/2020

|

David Kimberley

Markets

What's happening with oil?

We look at why the price of black gold went negative last week

26/6/2020

|

David Kimberley

Markets

Virgin Galactic and the race for space

Richard Branson wants to take tourists to space

26/6/2020

|

David Kimberley

Markets

The rise of Shopify

Online shopping has helped the firm’s share price soar

26/6/2020

|

David Kimberley

Markets

Why banks aren’t paying dividends

Pressure from the Bank of England might cost shareholders

26/6/2020

|

David Kimberley

Sign up for our newsletter

Download the app and start your
investing journey now.