A "SPAC"tacular change in the US IPO Market

3 Mar 2021by Aditya Anand Bapat

A "SPAC"tacular change in the US IPO Market

The investing world is constantly disrupted by new trends every few years. From ESG investing to crypto-currencies to “Robinhood investors” to “Reddit-empowered” Gamestop investors, we have seen quite a few trends in the past five years. Another trend that is catching up fast is the emergence of “SPAC” or Special Purpose Acquisition Companies. The trend is emerging fast; from one SPAC-led IPO in 2009, the number shot up to 248 in CY2020. SPACs have been the rage in the USA and Europe mainly. But before we move on, a bit more on what is a SPAC?

What is a SPAC?

  • A Special Purpose Acquisition Company (SPAC) is basically a “black-cheque” company that is set up with the sole aim of raising money through an IPO (Initial Public Offering) to acquire another company, going ahead.
  • A SPAC, by itself, has no commercial operations, products or services. This company’s only assets are money raised during the IPO.
  • A SPAC contains investments from its founders and general public. Once the money is collected, the SPAC gets listed. On listing, the SPAC looks to buy other private companies.
  • This way, the investors see a significant rise in the value of their stake in the SPAC.
  • The acquired company finds an easier way to get listed rather following the traditional IPO route.

Looks like a win-win for both parties, doesn’t it?

The rise and rise of SPACs

While SPACs have existed for several years, with not necessarily the same name, CY2020 has been the most dramatic year for SPAC IPOs, in terms of number of issues. Also, the average size of a SPAC IPO has been steadily moving up year after year.

SPAC IPOs in the USA by year

Avg. SPAC IPO Size ($mn) by year

Source: Statista

Source: Spacinsider

Note: *Data as on 21st February, 2021

Market share of US-listed SPAC IPOs versus total US IPOs

Source: Nasdaq website

 

Why are companies preferring the SPAC route over routine IPO listing?

A regular IPO involves a list of procedures prior to actual listing – doing roadshows, convincing a wide variety of institutional investors regarding future business prospects, determining optimum valuations, etc.

All these take time and are fraught with uncertainties. With COVID pandemic, the convincing bit became all the more difficult and meeting investors a challenge.

This is where SPAC has an advantage. With SPAC listing already done, half the hassle gets taken care of. Also, the negotiation works faster since only one party has to be convinced.

Retail investors do not know the type of company that will get acquired when they subscribe to the SPAC IPO.

However, these investors can draw comfort from the fact that the SPAC has on board a team of institutional investors, fund managers from PEs and hedge funds and many other high profile entrepreneurs.

The SPAC mechanism chart

Source: Nasdaq

  • Once an IPO is done, the proceeds are put in a trust account. The SPAC is given 18 to 24 months to scout for a suitable acquisition / merger.
  • If it is not able to find a target within the stipulated time, the SPAC gets liquidated and IPO proceeds are returned to the investing public with pre-decided interest.
  • If the merger/acquisition goes through successfully, SPAC promoters (also called sponsors) typically get 20% stake in the final, merged company.

Is there a flip-side to SPAC IPO?

  • At the time of its IPO, investors in a SPAC are not aware of which company will get merged / acquired. The target company may or may not match their investing choice or horizon.
  • Many sceptics argue that SPAC sponsors do not undertake thorough due diligence as much as an IPO.
  • There could be a lag time of as much as 24 months from the time of listing of a SPAC till it acquires a suitable target. During this time, the money could simply be sitting in an escrow account, earning no returns.

So there are no doubt, risks associated with this new form of investing. As with all other financial instruments, only time will tell whether this is a trend which will stay for the long term or fade away eventually. Regulators and lawmakers, will have to tweak laws appropriately from time to time to keep the instrument simple and low-risk.

Are there any SPACs in India?

One word answer to this question is – NO!!

Indian laws currently do not define SPACs clearly in any way.

On the other hand, the current Government has been going after shell companies very aggressively. Between 2017 and 2020, it cancelled registrations of nearly 4L shell companies.

SPACs have no business of their own and they collect public money at the time of IPO. The money is kept with the SPAC (in an escrow account) for about 18-24 months.  Hence, according to current Indian laws, SPAC could qualify as a shell company.

Current Indian laws will have to be modified to bifurcate definition of a shell company from that of a SPAC. However, SPACs are surely getting noticed by Indian investors and will hopefully also get noticed by lawmakers and regulators. It’s not that Indian companies have not had any SPAC connection at all.

E-grocer Grofers is said to be seeking a SPAC deal to list on the US bourses.

In 2015, a SPAC named Silver Eagle Acquisition, acquired 30% stake in Videocon d2h for ~$200mn.

In 2016, Yatra Online Inc, parent company of Yatra India, listed on NASDAQ, by way of a reverse-merger with another US-based SPAC, Terrapin 3 Acquisition.

Final Thoughts

The writing on the wall is clear – SPACs are here to stay alongside traditional IPOs.

The spike seen in 2020 may or may sustain going forward. However, Indian regulators need to sit and take notice of this innovative form of investment that is taking the investing world by storm.

As stated by CNBC website, “Goldman Sachs estimates that 93 SPAC funds are currently sitting on $63 billion in search of takeover targets. As an illustration of their potential, this implies a buying power of some $300 billion since a typical SPAC merges with a company five times its size once institutional investors buy-in”.

Given the enormous size of this capital that is waiting to get deployed, India cannot afford to miss the bus.

Even a small percentage of this money, if diverted to India, could lead to a huge capital inflow into the country and provide avenues for Indian companies to grow, expand and flourish.

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