special purpose acquisition company

Not another SPAC

We get it, SPACs are trending now.

But how many times are we going to read about SPACs this year? Don’t believe us? Check out the link below.

SPACs, or special purpose acquisition companies, did a record $109 billion in transactions globally in February, according to the FT. And through two months this year, SPAC activity (in terms of count) is already at 75% of last year’s total, says Capital Markets Gateway.

A quick refresher: A SPAC is a shell company that firstly goes public. Then it raises money. Finally, it uses those funds to acquire a private company. In the process of doing so, it takes them public.

Guess who’s in SPACs

Everyone is in. From Paul Ryan to Shaquille O’Neal to Serena Williams.

The latest SPAC deal is Rocket Lab. In case you have never heard of them, they a leader in launching small satellites into space. Rocket Labs realize the potential for larger rockets with heavier payloads. So they’ve decided to develop a larger rocket called Neutron. To do that, they need funds. So the company announced it’s merging with a SPAC to raise funds.

Let’s not forget that SPACs have been around for decades. David Nussbaum is credited with developing the first SPAC in 1993. This was a time when blank check companies were prohibited in the US. Over 500 SPACs have been listed since the 90s. These vehicles have raised more than $100 billion. However, only in the last few months have they exploded in popularity as an alternative means to go public.

So why are they so popular lately?

1. Supply and demand: The number of public companies has gone down dramatically over the last 20-30 years, dropping from 8,000 to just over 4,000 today. However, the amount of money flowing into the public markets has simultaneously been increasing. Because the stock exchanges make their money by bringing on new companies, they’ve pushed to bring more SPACs into the market.

2. The private equity market: There has been a huge increase in the amount of capital invested in private equity (over $2 trillion today). However, the number of exits has seen a decline. Private equity-backed portfolios are always looking for opportunities to exit and make a return, so they are supportive of the SPAC model.

3. SEC regulations: The SEC has become more involved in regulating SPACs, which has proven to boost their reputation in the investment world. They have stepped in to set a fixed price for each IPO, as well as regulate voting and redemption rights to the benefit of all parties involved.

 

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