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It is easy to mock spacs. For decades these “special purpose acquisition
vehicles”, publicly listed pots of capital raised by investors
who seek out private firms to merge with, have ushered a
small number of flaky and irrelevant companies onto public
markets. The present spac boom on Wall Street began last year
and, true to form, features celebrities-on-the-make, failed
bosses looking for redemption and credulous investors keeping
their eyes wide shut. Yet it is undeniable that something more
serious is also now taking place. The amount of money raised by
spacs in the past 12 months has soared to over $120bn, according
to Bloomberg. In a few weeks this year as much has been raised as
in the first half of 2020. The boom is spreading to Europe, and
Amsterdam is racing ahead of London as a favoured venue (see
Finance section). Serious companies are getting involved, too.
Two of Asia’s leading digital firms, Gojek and Tokopedia, are said
to be considering using a spac to list in New York, which would
be an alternative to a conventional initial public offering (ipo).
In an ipo a firm hires bankers who help it sell shares at an
agreed price to mainly institutional investors in an elaborate
process set out by regulators. The spac approach turns that on its
head. A group of investors float a shell company, giving it a pot of
cash. It then hunts for an unlisted target firm and offers to merge
with it, raising a second round of cash from investors as it does
so. If you are a firm that wants to go public, a marriage with a spac
is relatively quick and certain.
The spac boom partly reflects a rebellion among Silicon Valley
types, who have long grumbled about having to go through an
ipo. Banks charge fees of 5-7% of the capital raised. Bankers manage
the ipo price, and stand accused of setting it artificially low
in order to give a “pop” to the pals they deal with routinely in the
public markets at the expense of founders and early backers. For
over a decade many exciting firms have stayed sheltered in private
markets, an option afforded them by well-funded venturecapital
investors like Son Masayoshi of Soft-
Bank. As a result, the value of cash raised by ipos
as a share of America’s overall stockmarket value
had been in decline for years.
However, the pent-up demand to go public is
being unleashed at last. As well as spacs, some
firms are trying a third technique to go public
called a direct listing. Founders and employees
sell shares on an exchange for whatever investors
are willing to pay—an option made possible by high-frequency
traders, like Citadel Securities, who helped Slack and
Spotify, two tech stars, to debut in this way.
There are two big dangers. One is that the spac boom becomes
a bubble. Financial markets show many other signs of froth, including
the recent GameStop retail-investor frenzy and the surge
in Bitcoin’s price. If interest rates were to rise suddenly as a result
of inflation (see Buttonwood), and the music were to stop in
markets, the spac boom might end abruptly. That is unlikely to
pose a risk to the financial system, but some firms would be left
stranded at the altar. And spac investors might be clobbered.
The second danger lies within spacs’ design, which can range
from being efficient to being a rip-off. The typical spac creator
receives “promote” shares—the median stake is 8% of the postmerger
equity—for a trivial cost, meaning they make decent returns
even if the merged firm’s shares sink after it goes public.
Warrants (the right to buy shares at a given price in the future) are
given to early backers as an incentive, and can also dilute the returns
of outside shareholders. The presence of a cohort of badly
designed spacs is one reason why, on average, spacs have underperformed
both firms that debut via ipo, and the broader market.
Fixing these problems will require investors to be vigilant.
They should demand that spac creators forgo
their fat promote shares in favour of shares or
warrants that pay out only once other investors
have seen returns. The incentives doled out to
early backers should be trimmed, and restricted
to those who are prepared to hold on to their
shares long after a target has been acquired.
These changes would both improve the longterm
returns for investors and also discourage
more dubious ventures from being set up. Some spacs, such as
the one launched by Bill Ackman, a hedge-fund manager, have
already adopted more sensible terms.
The spac boom has a whiff of the bubble about it—and some
projects will end in tears. But with the right design, spacs can become
a familiar and useful device for investors. They give firms
more options for going public and will encourage regulators and
bankers to improve the ipo process. Rational risk-taking by investors,
capital-raising by exciting firms and the expansion of
public markets are all things that should be welcomed. Even if
some spacs crash and burn, the idea behind them is a buy.
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