Not surprisingly, with rising share prices and a lack of investment alternatives, the temptation for investors to invest the pent-up money on the stock market is increasing. Thus special situation funds of private equity companies have started to provide capital in specific circumstances (e.g. Advent international). Increasingly, IPOs through a shell company without any business activity of its own (SPAC, Special Purpose Acquisition Company) whose sole purpose is to raise money for an IPO and listing are also becoming more common. In the USA, around USD 13.5 billion was invested in 54 IPOs last year, and by the third quarter of the current year, a good USD 14 billion has been invested.

 

Difference to a normal IPO

In a conventional IPO, the issuing company looks for an investment banker who will take the share to the stock exchange; usually the one who offers the best conditions. The banker advises the company on the details of the new issue, including timing, size, price, etc. This is followed by an application for registration with the stock exchange supervisory authority and a preliminary listing prospectus (red herring) for investors. Based on this information, the investment bank can plan the placement of the issue, which will be completed with the final prospectus. In view of the stock exchange regulations and the market assessment that has been considered for a new issue, investors can assume that a certain amount of due diligence has been performed.

In a SPAC IPO, a sponsor with a viable business idea or activity seeks funds and/or investors for an IPO. The SPAC serves as a means (legally valid form) to an end (listing of a company on the stock exchange). Like venture capital investment companies (VC), the collected funds are invested in a private company in order to bring it to the stock exchange as quickly and easily as possible. And as with VC, the reputation and track record of the sponsor play a decisive role. The fact that he himself co-invests also contributes to confidence building. Nevertheless, the investment/takeover target or its activities and record at the time of founding the SPAC usually remain unknown.

 

SPAC Advantages

For a company this way of going public is attractive. A merger or takeover by a SPAC saves time and money. Much of the paper warfare is eliminated, an expensive listing prospectus and the time-consuming marketing (roadshow) are unnecessary. Unless the contract with a sponsor provides for unusual concessions or contractual penalties, the company can only benefit. A SPAC is also interesting for the sponsor. In addition to the advantages in terms of time and costs, such a procedure makes it possible to raise considerable sums of money for a purpose that is not precisely defined. Although this “blank cheque” is often limited in time, usually 24 months, it costs nothing as the money is refunded if the new issue doesn’t materialize.

 

SPAC Disadvantages

Not quite unexpectedly, the disadvantages mainly affect the investors. Although SPACs have been in use in the USA for quite some time, they are a relatively new investment instrument and therefore hardly regulated at all. The stock exchange supervisory authorities are well aware of the shortcoming, but it takes time and probably (negative) experience until well-thought-out regulation is available. Until then, the investor cannot assume that the stock exchange supervisory authority has actually examined a SPAC. The most serious disadvantage is the impossibility of an own analysis of the company that is to be listed on the stock exchange. This is similar with venture capital, but there the money raised is invested in a portfolio of several unlisted companies and not just in one single one (diversification). In addition, the VC companies periodically report on their investments and the investment horizon is long-term, which makes it easier to plan IPOs or sales at a favorable time.

 

Conclusions

In view of the increasing liquidity ear-marked for the stock markets and the lack of signs that this will dry up in the foreseeable future, more SPAC and similar investment vehicles can be expected. According to the saying “trust is good, control is better”, caution is advised. To make an individual investment based solely on the fact that a sponsor is well known is foolhardy. After all, a minimum of fundamental key data of the company willing to go public is required. Should there still be an investment interest, it is advisable to wait for the listing and give the market time to make an assessment.

 

 

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Christian Wagner
Financial Advisor