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The SPAC craze: What’s the big deal anyway?

Moneycontrol digs deep and breaks down the investment vehicle that became a smash hit in the US market in 2020 and taken the global deal street by storm. Can India join the frenzy?

February 17, 2021 / 05:40 PM IST
2020 saw 250 SPACs listing on the US bourses raising nearly $83 billion.

2020 saw 250 SPACs listing on the US bourses raising nearly $83 billion.

What’s the connection between NBA legend Shaquille O Neal, or Shaq, tennis star Serena Williams, former Facebook executive and Silicon Valley investor Chamath Palihapitiya and Indian media veteran Uday Shankar?

The answer—SPACs!

If the term sounds familiar, it is because there is no escaping it. SPACs pops up in everyday market discussions. News reports are awash with its popularity.  So is it a new fad? What exactly does it mean?

Alright, let’s get down to business and demystify this buzzy investment method.

What is the full form of SPAC?

SPAC translates into “special purpose acquisition company”. Essentially, it’s an investment structure or an entity, which is set up specifically or specially for the purpose or objective of making an acquisition or buyout.

Tell me more.

Okay, so a SPAC is a shell company without any commercial operations and is run by an experienced management team (with expertise in a certain segment or sector) or a sponsor. The sole aim of a SPAC is to raise capital via an IPO (initial public offering) to acquire a private business at a later date and then take it public without going through the traditional route of IPOs.

These companies own and manage nothing except the funds that they raise, and when they have an IPO, they do not even have to recognise the ultimate acquisition target. Hence, SPACs are also referred to as “blank cheque companies”.

Ok! Let me guess. The personalities in your opening question… are they by any chance, all SPAC sponsors?

Bingo! You guessed right. Well done!

Chamath Palihapitiya, the self-confessed answer to Warren Buffet in the Reddit era of investors, is the undisputed SPAC king for now. He raised nearly $4.5 billion by sponsoring 6 SPACs in the US market, one of them including Richard Branson’s space tourism firm Virgin Galactic which had a successful market debut. Uday Shankar is reportedly exploring a SPAC with James Murdoch for Asian targets in the media and technology sectors.

Serena Williams, who launched a venture capital firm called Serena Ventures in 2014, is on the board of a Miami beach-based SPAC called Jaws Spitfire Acquisition which is eyeing consumer tech targets.

Shaq (an early investor in Google, an early investor in smart doorbell company Ring which later got acquired by Amazon and a board member of pizza chain Papa Johns) and his friends have floated a SPAC called Forest Road Acquisition Corp. Yes, I know what you are thinking. Do not underestimate the business acumen of sporting legends.

Last year has also seen the likes of Masayoshi Son-backed SoftBank, private equity group Apollo Global Management and Bill Ackman’s hedge fund Pershing Square sponsoring SPACs.

Can we have some stats please to justify the popularity of SPACs?

Sure. SPACs are a smash hit in the US market. 2020 saw a whopping 250 odd SPACs listing on the US bourses raising nearly $83 billion. The average fund raise in each case was around $330 million.

Woah! That’s mighty impressive. Ok coming back to the modus operandi. Tell me more about the steps involved in a typical SPAC listing?

 So the management team which is normally invested in a SPAC (around 20 percent and thus it has “skin in the game”) goes out with a plan to raise resources by way of offering the remaining 80 percent to public shareholders by selling shares and warrants in a bundled unit.  Here’s where the management term’s experience, professional reputation, acquisition strategy and domain expertise in a certain sector comes handy in terms of enticing investors. The IPO money is kept safe in an escrow account or trust to be accessed later once the acquisition target is identified. So the cash is conserved until a deal is spotted.

So far, so good. How long does the SPAC team have to find a suitable target and complete the acquisition?

 Usually, the SPAC team has a timeframe of two years. If it fails to find a suitable target and complete the process in two years, the SPAC gets delisted, liquidated and the entire money kept in the escrow account is refunded to all the investors. If the target is identified within the timeframe, then post the approval of the proposed acquisition by SPAC investors, the SPAC and the target combine to form a publiclly traded operating company, leading to an automatic listing.

Neat! But, at the approval stage, what if I don’t agree with other SPAC investors and want to opt out post the hunt?

 No sweat! Here comes the good part. As a SPAC investor, if you are not comfortable with a planned purchase and disagree, then you can sell your shares and exit but you get to keep the warrants. These warrants give you an additional upside if the SPAC is successful and goes better than expected.

Wow! So SPACs give an investor the chance to access a future deal or an option to opt out as well. This is way cooler than I thought!

 I told you!

So why are SPACs being seen as an alternative to traditional IPOs and what has made them popular?

For starters, SPACs are considered a safe bet during choppy markets and the global outbreak of COVID-19 has played a major role in its popularity. Traditional IPO’s are seen to be expensive and far more time consuming in terms of registrations, disclosures and processes. SPACs involve lesser parties, lesser negotiations and are perceived to offer a faster and flexible route for venture capital funds and private equity majors to take their private companies public.

SPACs are also cheaply priced and therefore accessible to the mass retail investors segment. More often than not, they pick the hottest, unique, futuristic businesses in the tech and consumer space as acquisition targets and so are believed to be popular with young, savvy, new age investors. And without doubt, there is far greater comfort, as a SPAC merger is a privately negotiated deal with a set price, and hence, less vulnerable to a sudden phase of market turmoil. Finally, as highlighted earlier, SPAC investors have downside protection on their bets.

Hey, I am no cowboy investor and this is a brand new market mechanism. And anything new, usually has its share of risks. Should I be worried about anything? 

First and foremost, SPAC investors usually don’t know how their funds will be used or what the eventual target will be. And their funds can stay stuck and lie idle for as long as two years. So there is an uncertainty factor for sure and hence, its crucial to filter a solid management team at the outset as your bet is on the skill set of this team to spot a suitable target with high growth potential.

The explosion in SPAC activity has been seen in the US market for the last year or so, and this frenetic SPAC shopping could lead to better terms being extracted from investors, reducing the premium potential later.

Not to forget, investors need to carefully read the fine print as in some cases and scenarios, certain clauses may not necessarily mean a complete refund of monies if sought. Also, some experts argue that the crème de la crème of the targets may have already been merged and the overall pool is less attractive now.

Clearly, the excitement around SPACs has reached a fever pitch in the US market. But what’s the scene in Asia?

Here’s some context. The Hong Kong Exchange has seen a lot of tech listings in the last year while the Singapore Exchange is considered the prime destination for the listing of REITs (real estate investment trusts ) in Asia. Both the rivals have noted the increasing appetite for SPAC’s and are evaluating a potential framework for Asia focused SPACs to list in the region. But they have to compete with the sophisticated, experienced and deeper capital pool available in the US. Also, don’t rule out Malaysia, which saw its first SPAC listing back in 2011.

Has India seen any SPAC deals so far?

Back home, SPAC structure deals are not entirely new to Indian companies. For instance, in 2015, Silver Eagle Acquisition, a SPAC acquired a 30 percent stake in Videocon d2h for around 200 million. In 2016, Yatra Online, the parent company of Yatra India, listed on NASDAQ, by way of a reverse-merger with another US-based SPAC, Terrapin 3 Acquisition.

And recent reports indicate that renewable energy major ReNew Power and food tech firm Swiggy are eyeing listings in the US market via the SPAC route. But with India being one of the world’s biggest hubs for tech and consumer internet startups, what about a desi SPAC regime in India with adequate checks and balances?

Over to SEBI Chairman Ajay Tyagi and his team!

Ashwin Mohan