Special Purpose Acquisition Vehicles

What is a Special Purpose Acquisition Vehicle?

A special purpose acquisition company (“SPAC”), or a blank check company, is a shell company with no operations. A SPAC intends to go public for raising money in order to acquire other businesses or merge with another company that uses the proceeds of the initial public offering (“IPO”) in a pre-set time frame. Stock exchange rules allow for 36 months time frame from the IPO closing date; however, most IPOs designate 24 months from the IPO date to complete the process. Many young businesses and companies go through the process of a reverse merger through SPAC and raise funds by selling equity to private investors (“PIPE” or “Private Investment in Public Equity”) to bypass the lengthy IPO process. SPAC IPOs are completed in a short time frame (matter of weeks or 8 weeks) as there are no financial statements, assets, or business risk to describe.


The shareholders of SPAC must approve the business combination. As at least 20% of SPAC’s outstanding shares are held by the founders and sponsors, and the founders vote in favor of the transaction, hence, SPAC only requires 37.5% of the public shares to achieve a majority vote for approval of a transaction. If the business combination is approved by the shareholders and financing and acquisition terms are satisfied, the combination is consummated and referred to as De-SPAC transaction and the SPAC and target combine into a publicly traded operating firm. SPACs generally state an industry or geography focus in their prospectus though they are not limited to this industry or geographical focus and can venture into new territories.


SPAC capital structure consists of Founder Shares and Founder Warrants, Public Shares and Public Warrants. Typically the public investors are sold units, that comprise of one common share and a fraction of warrant to purchase a common share in the future. The per unit price is usually $10.0 and following the IPO, the units become tradable with units, shares and whole warrants listed on the exchange. Public shares are equal to at most 80% of the shares outstanding after the IPO and founder shares are equal to 20% of the total shares outstanding after the IPO. 85% to 100% of the proceeds through a SPAC IPO is set in a Trust Account and invested in short-term government, low risks bonds or held in cash and is to be used for merger and acquisition (“M&A”) activity. The target(s) of acquisition must have a fair market value that is equal to at least 80% of the SPAC’s net asset value at the time of the acquisition. SPACs typically target business combination targets of two to three times the size of the SPAC asset values and IPO proceeds to mitigate the dilutive impact of the founder shares (shares held by sponsors prior to SPAC IPO). There is no maximum size for the De-SPAC transaction so long as the SPAC does not turn into an investment company under the Investment Company Act of 1940 (this does not necessarily mean that the SPAC investors have to own 50% of the voting stock of the surviving company, as the Investment Company Act merely requires that the public company control its operating subsidiaries.)[1]

If a target is not found within the set time frame or SPAC’s liquidation window, it must return capital to public shareholders and dissolve itself.


SPAC allows retail investors to invest in private equity and leveraged buyout deals; a space that is mostly dominated by institutional investors due to their extensive capital and network. SPACs are generally run by experienced management teams with M&A, private equity and operational experience.

The following displays the three phases in SPAC lifetime:


Why is a Special Purpose Acquisition Vehicle created?

A SPAC is created to acquire or merge with other businesses, usually private businesses, that are planning to go public and would like to bypass the IPO lengthy process.


What are the benefits and downsides of Special Purpose Acquisition Vehicle?

For the private business, an IPO through a SPAC rather than a reverse merger, comes with a clean slate (the shell company); it raises more money than other routes such as a reverse merger; it raises more money faster than the private equity funds after the IPO; it attracts more investors including retail and institutional investors as it is more liquid; and it comes with an experienced management team. Risk factors are generally lower in a SPAC relative to a reverse merger. Management of the target company can continue to run the business, as is, under its existing name while accessing public expansion capital under a public company structure and sit on the board. Management of SPAC also join the existing board members of the target company.


What is the state of IPOs and Follow-On in 2020?

The following displays the number of IPO transactions and million USD raised through Filed IPO’s globally by sector and region. As displayed, the top five industry segments active in IPO’s in 2020 include Investment Trusts ($55.504 billion raised through 166 transactions), Software & IT Services ($23.176 billion raised through 112 transactions), Pharmaceuticals & Medical Research ($18.131 billion raised through 105 transactions), Industrial Services ($10.816 billion raised through 102 transactions) and Industrial Goods ($8.749 billion raised through 91 transactions). Overall, $187.233 billion through 1,043 IPO transactions was raised worldwide as of Oct 2nd, 2020.


US ($84.076 billion), China ($60.72 billion), India ($5.664 billion), Brazil ($4.647 billion) and UK ($4.363 billion) are the top five countries with the highest IPO proceeds raised on the list. Canada is the 7th on the list with $2.946 billion raised as of Oct 2nd, 2020.


2020 Filed IPO Count and USD MM By Sector Worldwide
2020 Filed IPO Count and USD MM By Sector Worldwide
2020 Filed IPO Count and USD MM By Country Worldwide
2020 Filed IPO Count and USD MM By Country Worldwide

The top five industry segments active in Follow-Ons in 2020 include Banking & Investment Services ($70.724 billion raised through 403 transactions), Pharmaceuticals & Medical Research ($69.905 billion raised through 730 transactions), Software & IT Services ($37.029 billion raised through 549 transactions), Real Estate ($35.843 billion raised through 200 transactions) and Transportation ($35.843 billion raised through 200 transactions). Overall, $556.156 billion through 6,087 Follow-On transactions was raised worldwide as of Oct 2nd, 2020.

US ($138.635 billion), China ($102.21 billion), Australia ($57.882 billion), India ($33.682 billion) and UK ($31.212 billion) are the top five countries with the highest Follow-On proceeds raised on the list. Canada is the 9th on the list with $14.632 billion raised as of Oct 2nd, 2020.


2020 Follow-On Count and USD MM By Sector Worldwide
2020 Follow-On Count and USD MM By Sector Worldwide
2020 Follow-On Count and USD MM By Country Worldwide
2020 Follow-On Count and USD MM By Country Worldwide

What is the state of SPAC IPOs in 2020?

As of Oct 2nd, 2020, $24.847 billion has been raised through SPAC Filed IPO’s globally through 91 transactions. 94% of the raised capital is through US SPACs, and the remaining are spread across China, UK, Russia, Canada, Israel, Hong Kong, and South Korea. The average capital raised per SPAC IPO in the United States is $312 MM, and $273 MM globally.


2020 SPAC IPO By Region and USD MM
2020 SPAC IPO By Region and USD MM
2020 SPAC IPO By Region and USD MM
2020 SPAC IPO By Region and USD MM

The following displays SPAC IPOs by region, issuer and USD MM raised.


2020 SPAC IPO By Region, Issuer and USD MM
2020 SPAC IPO By Region, Issuer and USD MM

August and September have been the most active months for SPAC IPO’s globally as displayed below with $7.608 billion raised in August via 20 transactions and $5.965 billion raised in September via 26 transactions globally.


2020 Worldwide SPAC IPOs in USD MM By Month
2020 Worldwide SPAC IPOs in USD MM By Month

Which banks and financial service firms have been the most active in SPAC IPO space in 2020?

The following is the list of banks and financial institutions that have been active in 185 transactions as co/underwriters in 2020, year to date (“YTD”). Goldman Sachs & Co (12 transactions), Citigroup Global Markets Inc (11 transactions), Credit Suisse Securities (USA) LLC (10 transactions), UBS Securities LLC (10 transactions), Cantor Fitzgerald & Co (9 transactions), Deutsche Bank Securities Inc (8 transactions) and I-Bankers Securities Inc (8 transactions) have been the most active in SPAC IPO space in 2020.


Banks and Financial Institutions Active in SPAC IPOs in 2020
Banks and Financial Institutions Active in SPAC IPOs in 2020

Sources:

Modelyze Investments

Refinitiv

Wikipedia

Harvard Law School