A special purpose acquisition company (SPAC) is formed for the purpose of raising capital through an IPO and using those funds to acquire an operating business.
SPACs unite knowledgeable management teams, often consisting of industry experts, private equity sponsors or other financing specialists who can take advantage of their proficiency to raise capital to acquire, then run, a new public company. within 24 months or even less, a SPAC will identify an appealing company to acquire and, once that deal is completed, a new publicly traded company is formed.
SPAC IPOs have never got much footing with long-term investors due to the risks involved: financiers do not know ahead of time which company a SPAC will buy, although some do lay out ahead of time what sectors they intend to be active in. Most of their investors have wound up being hedge funds speculating on the SPACs ability to complete their targeted acquisition.
Chinh Chu, well known for his past in deal-making at Blackstone, was quoted as saying:
The primary reservation investors have about SPACs is that it’s a new product and they don’t fully understand it.
Historically, SPACs have not been so lucrative or appealing to investors. Over the last 4 years, their average returns were around 8 percent. When compared to the 28 percent gains over the same time period in the general IPO market, it’s easy to see why SPACs have been a hard sell.
However, the most recent government shutdown opened many investors eyes to the potential of SPACs as Blank Check company IPO’s were still able to move ahead despite the shutdown. Howard Fischer, the CEO of Basso Capital went on record saying
“SPACs are having their day right now, for sure. Could the shutdown increase it? I think it is contingent on the government remaining shut and interesting deals coming”.
