‘SPACs’; the flashy new acronym being bandied about Wall Street and a hot topic on the minds of both professional and retail traders alike. With high profile investors such as Bill Ackman and Chamath Palihapitiya becoming heavily involved in the SPAC scene, many investors are wondering what are SPACs and why have they risen to prominence in 2020?
What is a SPAC?
A Special Purpose Acquisition Company (SPAC) is an investment vehicle enabling companies to be taken public on the stock market via an Initial Public Offering (IPO) that merges the acquisitioning company and its target. Prior to the merger, the ‘blank check company’, formed solely for the purpose of acquiring a target company in a specified business area or industry, raises capital through the contributions from investors or sponsors.
Over the past decade, SPACs have become an increasingly popular choice for investors due to their high returns both nearing and upon completion of their chosen SPAC’s merger. This year 133 SPACs have been created in the USA, raising a total of £39.1 ($51.1) billion in the process. When compared with previous years it is undeniably clear that SPACs are skyrocketing in terms of popularity with 59 SPACs being created in 2019 and 46 in 2018, both generating £9.3 ($12.1) and £7.4 ($9.7) billion respectively.
High Profile SPACs
Over the course of 2020, there have been a handful of SPACs that have gained notoriety due to the sheer size of their offering bid or the fame of their chosen target company. Bill Ackman recently created his own blank check company, Pershing Square Tontine Holdings (Ticker: PSTH), which made history as the largest SPAC ever with an offering of £3.1 ($4) billion. The aim of Ackman’s SPAC is to bring a specific type of company public, a ‘unicorn’ i.e. a privately held startup company valued at over $1 billion.
The Dark Side of SPACs
While these modern versions of IPOs appear to be a sure-fire way for investors to increase portfolio returns with little downside or risk to their capital, there are a few cases in which SPACs have not lived up to expectations. An example earlier this year would be Nikola Corporation (Ticker: NKLA), a company that specialises in developing hydrogen powered trucks, which was brought public by VectoIQ Acquisition Corp., catching the attention of ESG investors and other retail traders in the process. Despite its stock price increasing 6 times over following the merger and the company securing a £1.5 ($2) billion deal with General Motors, a damning report from Hindenburg Research revealed that Nikola had lied about the reliability and progress of its trucks leading to a class action lawsuit being levied against them and causing the stock price to tumble. With Trevor Milton, the CEO of Nikola, having stepped down in September amongst these allegations, it will be interesting to see how the company will weather this storm.
The Future of SPACs
With all of these events and opportunities over the past year, SPACs have truly become a space to keep an eye on for all investors. It is likely we will see bigger and more high-profile offerings in the coming years and only time will tell whether this growing bubble will keep producing high returns for investors or pop and leave everyone ‘holding the bag’.