Why US Investors Are Investing Into SPAC ?

A new type of investment is sweeping the marketplace, and investors are jumping into the SPACs (Special Purpose Acquisition Companies). And they are red hot right now.

SPACs are special purpose acquisition companies, essentially shell companies that raise money from investors through stock-market listings. After going public themselves, they look for private companies to buy. Think of SPACs as a type of “pre-IPO”: allowing investors to get in on the ground floor before the company merges with a well-known, but not yet publicly traded company.

They allow private companies to go public on a faster timeline, and there’s more certainty of a company’s valuation. Such transactions make those private companies public without having to go through the traditional initial public stock offering process, which involves “roadshows” to drum up investor interest and an intense media spotlight.

The total value of SPAC deals completed between 2019 and 2020 jumped 400%, according to data from Dealogic. And so far this year, the number of completed deals already totals more than half of those done in 2020. From January to October 2020, 165 new SPACs were listed. The top performing SPAC of 2020 returned investors an astonishing 1,115%.

Hence, SPAC has no commercial operations - it makes no products and does not sell anything. In fact, the SPAC’s only assets are typically the money raised in its own IPO. SPACs are good picks for potentially huge returns, like the ones above.

SPACs lined up for 2021, include Bill Gates-backed portable ultrasound start-up Butterfly Network (valuing the company at $1.5 billion) and DNA-testing startup 23andMe is reportedly in talks to go public through a $4 billion deal. There is also buzz that digital media companies like BuzzFeed, Vice Media, Bustle Media Group and others could use SPACs to finally bring in money for their investors.

A SPAC has a typical lifespan of 18-24 months, but completing a merger with a SPAC can take as little as six months after the signing of an initial agreement. SPAC mergers aren’t simple, however, and understanding all their intricacies can be daunting. Most importantly, a company going public via a SPAC must meet the same extensive regulatory requirements as those taking an IPO path-only in a matter of a few months, not the year or two that a typical IPO can take.