Special purpose acquisition companies (SPACs) have been around for decades, but in the spring of 2020, they became an extremely popular alternative route for private companies to go public. The subsequent record-breaking surge in SPAC issuance and merger activity that followed was astounding by all measures and led 2020 to be widely dubbed, “the year of the SPAC.” These vehicles also garnered an enormous amount of attention due to volatile trading activity across several high-profile targets, raising the question of whether SPACs represent a dangerously speculative asset, or if investors can turn to them as part of a legitimate portfolio investment strategy.

In our view, investing in SPACs may provide a differentiated return stream depending on risk–return objectives, and can be accessed through either a low-risk, consistent return or high-risk, high-potential reward strategy. However, as with any investment, it’s important to understand the key features and complexities before diving in headfirst. In this paper, we break down the basics of the SPAC structure and the reasons behind its sudden rise to prominence, as well as review how we believe investors should be thinking about SPACs. First, let’s get the lay of the land.

What is a SPAC?

A SPAC is a “blank check” company that is formed to raise capital in an initial public offering (IPO) with the sole purpose of merging with an unspecified private firm, thereby taking it public. Following the IPO, SPACs have a specified timeframe, typically two years, to find a target firm and, pending majority shareholder approval, consummate a merger or otherwise liquidate and return cash plus accrued interest to investors.

SPACs have been around since the 1990s as an alternative channel to public markets. However, they initially earned a less than savory reputation and were viewed as more of a backdoor option for smaller, less established firms, to whom the traditional IPO process was inaccessible. Loosely regulated at first, SPACs were frequently associated with fraudulent activity, which brought about a wave of regulatory change, thereby helping to legitimize the structure for sponsors, investors, and target companies alike.

Even before the pandemic, SPACs had seen an uptick, public evidenced by strong IPO activity in January and February of 2020. Soon thereafter, a confluence of factors that began during the market meltdown in March 2020— including a temporary freeze in the IPO market, growing support from high-quality sponsors, and a surge of interest from retail investors—helped usher in a surge of SPAC IPOs and mergers. In 2020, 248 new SPACs came to market, encompassing 53% of all IPOs for the year, and raising a cumulative $83 billion, more than five times the volume of the previous year. And 2021 has started off with a bang as well, with more SPAC IPOs in 2021 (through April 7) than all of 2020 combined.1

1 https://spacinsider.com/stats/ 

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