Special Purpose Acquisition Corporations: Innovation in IPO Markets

Business, Uncategorized

Bill O’Brien, Editor


Special Purpose Acquisition Companies (SPACs) have been fueling IPO markets in recent months, generating buzz around the investment vehicles that have been around since the 1980’s.

There are sharks in the water in today’s markets, and no, I don’t mean that there are savvy investors with gills making trades from coves below sea level. In recent years, SPACs, or special purpose acquisition companies have taken on a much larger role in market participation and the initial public offering (IPO) scene than they have in previous years. SPACs themselves are actually quite an intriguing investment vehicle. Special purpose acquisition companies, essentially, pool money from investors, whether it’s from institutions or the general public, and use that pooled capital to acquire a stake within a company and bring it to the public market through a merger. SPACs provide companies with an alternate and “fast-tracked” means of gaining access to public funds.

Investment bank Goldman Sachs has had a lot to say about SPACs in recent months. Olympia McNerney, a member of Goldman’s equity capital Markets and alternative capital markets group in New York, spoke on the bank’s podcast, “Exchanges at Goldman Sachs” to talk about the trend. “Right now there are about 100-plus SPACs that are on the hunt for acquisition and to frame that in terms of dollars, that’s about $30 billion dollars of capital on the hunt to bring companies to bring companies into the public market.” That figure is further amplified by SPACs proclivity to make leveraged acquisitions so, in Olympia’s words, “that $30 billion, think of it as probably $150 of market cap that SPACs are on the hunt for, so a very very large number.” In discussing what is driving SPAC popularity with investors, Olympia discusses a number of reasons.

Evolution in the “profile” of the investment vehicle over “not just the last 2 to 3 years” but even over the last “6 to 12 months,” growing comfortability among institutional investors in understanding the economics of SPACs and SPAC economics becoming “more friendly” for the market makers invested in them and the companies looking to merge with them are just a few. Also discussed in Goldman’s podcast were the unique pros to working with a SPAC instead of having an IPO for a company. A potentially faster path to public markets, potentially more certain valuations around the company, and potentially more proceeds than an IPO could deliver, especially in today’s climate are pros Olympia cited as well

To Olympia’s point, SPACs are gaining traction in the world of high finance. Bill Ackman, founder of hedge fund Pershing Square Capital Management and notorious Valeant Pharmaceuticals investor, founded his own SPAC this year, Pershing Square Tontine Holdings. It is currently the largest SPAC ever founded at $4 billion. The popularity is not surprising, as the IPO market experienced a lull due to pandemic-related market volatility, and we are not out of COVID-19 waters yet. SPACs are inherently more resilient to broad market sentiment considering the investors they attract, so they can create great opportunities for corporations looking to go public during an economic downturn.

Special purpose acquisition companies are becoming more popular in the investment community and are innovative instruments in the IPO market. What were once transactions that were exclusive to private equity funds are now open to the general public, along with the prospect of the lucrative returns they can bring. In a world with increasingly suppressed yield fixed income markets and high price-to-earnings equity markets, these kinds of instruments will likely become more popular to both the institutional investor and retail investor alike.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s