Who Benefits the Most From a SPAC


Special-purpose acquisition companies (SPACs), otherwise known as blank-check companies, are all the rage. But among company founders, founders of the SPAC, and investors, who benefits the most from them?

Put simply, SPACs are companies created with the sole purpose of raising money to buy other companies, and taking them public. SPACs have raised more than $56 billion in 147 IPOs, according to SPACInsider, far surpssing last year’s $13 billion. And according to Bloomberg, more than 60 SPACs have formed since the beginning of the year. 

And there’s a reason they’re so popular. SPACs are often faster and simpler than a traditional IPO and offer investors some flexibility as to whether they want to cash out or keep shares with the company. Also, uncertainty due to the pandemic and upcoming presidential election have markets in flux, meaning IPOs are more of a risk than usual. Plus, there’s an enormous amoung of capital available–about $1.45 trillion in unspent private equity capital as of June 2020, says Deloitte. 

No wonder everyone wants a piece of the action. As Bloomberg says, SPACs are the top “status symbol” of 2020. Top founders, executives, and investors alike are launching them, such as venture capitalist Chamath Palihapitiya, CEO of MGM Holdings Harry Sloan, billionaire founder of Pershing Square Capital Management Bill Ackman, LinkedIn co-founder Reid Hoffman and even former house speaker Paul Ryan.

But with everyone getting into the game, who benefits the most?  Let’s break it down:

For the founders of the target company going public, it’s less of a headache

SPACs are simpler than IPOs. Since the transaction is a merger, founders need to negotiate with only one party, the acquirer. No road show required to peddle shares. When the deal is done, the company goes public at a set valuation. Basically, the pitch is much easier. “When you compare it to an IPO, the pitch is actually very simple: it is a better way to go public,” Chinh Chu, an influential SPAC sponsor, told Bloomberg News.

Of course, founders can also see a huge payday depending on how many shares of the company they own when the deal is done. For instance, Austin Russell, the 25-year-old founder and CEO of Luminar Technologies, an Orlando-based company that makes light detection and ranging sensors, or lidar, that help guide vehicles, is set to become one of the youngest self-made billionaires because of a SPAC. Russell will hold a 35 percent stake in his company when it goes public, worth roughly $1.1 billion at Luminar’s current valuation,  according to a proxy statement filed Monday.

Investors in the target company get faster returns

Because SPACs are completed through a contract, early-stage venture investors have a quicker out. In a traditional IPO investors often face a six-month lockup, which can create an “overhang” on the stock before they’re able to sell that weighs down the price. Private equity firms especially, says John Washlick, a shareholder at Buchanan, Ingersoll & Rooney’s healthcare practice, are looking to get involved in SPACs, because they can see a more immediate and definitive return on their investments. Washlick personally handles transactions related to mergers and acquisitions and joint ventures. “They want that 20 percent kicker. They want to consolidate or invest in a company, and flip it to a SPAC, because then they did it, they’re out, and they don’t still hold paper after it goes through the IPO.”

The SPAC’s sponsor makes it big

Washlick notes that while there’s some risk on the part of the SPAC operator, the payout usually compensates for it. “The ones who go out there, raise hundreds of millions or billions, if all goes well, they’re gonna get paid well, and they’ll take back stock as well,” he says. If the organizers, those who found and seek out investors in the SPAC, strike a deal, they’re able to purchase 20 percent of the business for next to nothing, which is a gold mine if the share price rises, which is what happened when fantasy sports betting company DraftKings’ has done since it merged with SPAC Diamond Eagle Acquisition Corp.

SPAC investors face lower risks

According to Barrons, SPACs are priced at $10 for a share and a warrant (or fraction of a warrant). A warrant is a document that gives a person the right to buy a share at a specific price after the merger. Most of the time this money must be spent in a specific time period, usually within a couple of years, and if it’s not spent, the money is simply returned by being put into a trust. “There’s money in these SPACs and they have to spend it,” says Washlick, noting that there’s less risk as an investor getting shares in a SPAC as opposed to getting involved in a traditional IPO. Participating in the SPAC is essentially low-risk. If an investor in the SPAC doesn’t like the target company, they can simply get their money back, and they can trade their shares or the warrants.

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