What You Should Know When Investing in a SPAC
As pioneers in the development of special purpose acquisition corporations, or SPACs, we are excited to see the growing role of the vehicle in capital formation. Since the time of its initial development, we have always believed that this vehicle is an excellent and streamlined way to take innovative growth companies public.
With the growing popularity of SPACs among the financial community, there has been an increase in investment activity as well as questions into the structure and the investor safety of the vehicle. Given this, investors are reading a lot about SPACs but are not always sure what to make of them.
We think we can help. As SPAC-focused bankers, we are in a unique position to educate investors about the ins and outs of SPACs – what to look for and what to avoid. Well-informed investors make smart, informed decisions. It’s our belief that this is good for everyone in the industry, particularly for institutional and retail investors that are investing for the long term.
In this first post, we will offer three thoughts investors should consider when investing in a SPAC throughout its lifecycle.
- Invest at or around the initial public offering (IPO) price of the SPAC. As an industry standard, all SPACs go public at $10 a share, and the team has 18-24 months to source, evaluate and consummate a business combination with a target company. At any time between the IPO and when the acquisition of the target company is finalized, an investor who came in at $10/per share can sell his shares or, when presented with a vote on a potential transaction, can choose to get back their investment, plus interest. In effect, for $10 a share, the investor is reserving a front row seat which will let him or her evaluate the target company. If the investor likes what he or she sees, he or she can stay in the deal; if not, the investor can pull out and get his or her money back. Not many other investments offer that degree of protection. Plus, most SPAC IPOs are sold as units containing one share of common stock and a fraction of a warrant. Investors who choose to pull out can still keep their warrant.
- See who else is investing alongside you. When a SPAC is ready to make an acquisition, it often raises additional money from outside investors to finance the purchase. These additional funds come in the form of a PIPE, short for private investment in public equity, and are typically from accredited, institutional investors. Since they are typically large institutions, PIPE investors carefully evaluate and perform due diligence on the target company. As such, their capital commitment is a sign of strong support and belief in the target company’s value. What you, as a retail investor, should look out for is: Who is putting money into the PIPE? Are they blue-chip names like Fidelity or Blackstone or Wellington Management, firms with a reputation as sophisticated and savvy investors? These high-quality buyers vet deals in a way the average investor cannot, and they are also far less likely to be swayed by hype and puffery. Their support is evidence that they believe the proposed acquisition is attractive and a validation that you are in good company. You should also examine the structure of the PIPE transaction. Are the PIPE investors buying stock at $10.00 per share, or are they paying a lower effective price?
- Take long-range forecasts with a grain of salt. Because target companies are going public through a merger instead of a traditional IPO, they are more likely to present projections about performance several years into the future – this differs from the traditional IPO. Buyers should be wary of these forecasts. The future is always hard to see, and the further out in time you go, the murkier the picture gets. On top of that, SPAC sponsors have a vested interest in presenting the most favorable picture of their prospects. While investors should examine the forecasts, there should also be an examination of the target company’s balance sheet and leadership team. What they should not do is assume that the projections will come true.
To us, SPACs are a fascinating subject. Over time, we hope to write more about them and demystify them for the investing public.