There are three things which are all the rage in the financial world these days – reddit stocks that memers invest in, bitcoin and SPACs. Since we have already discussed the first two, it would be unjust to leave out the SPACs.
Let’s unpack. SPACs are short for Special Purpose Acquisition Company. These are formed specifically to acquire an existing private company.
Let’s say a group of sponsors – you, me and Bagpiper – wish to float a SPAC. In order to do so we will first register a company with some capital (initial funds). The company though would have no commercial operations, i.e., the company does not do anything – like your managers. Next, we would boldly go and announce that we would be taking this ‘blank cheque’ company public and if you wish to invest in the IPO, please do so. We will then take all the money and put it into an interest-bearing trust account
But why all this hassle?It’s because a SPAC has the mandate to find a company to merge with them and they have a maximum of 2 years to do so. They hire underwriters and investments bank to negotiate with the target companies and once done, those companies become a part of the SPAC
Pros
A small private firm need not go through the hassle of filing an IPO and then waiting for it to open successfully
Initial investors often get huge returns on their investments
If the deal isn’t closed in 2 years then the money is returned to the investors
A SPAC’s working capital is often the interest earned from the initially invested amount
Specialised ‘going public’ process
Cons
Opportunity cost of the interest you could’ve earned in a scenario of the deal not materialising in 2 years
No control over the company SPAC would be merging with
40% of the money invested in SPACs in 2020-21 are from retail investors. Questions on why qualified investors wouldn’t want a piece of this
Flowchart: SPACs creation to merger. Courtesy : MBP
Anyhoo, SPACs are interesting. However, as ‘mint’ writes the SPAC-ships are still UFO in India. But with the startup ecosystem seeing the light of the day, our regulators should consider this.