(Bloomberg Wirtschaftswoche) – The new big money status symbol of 2020 is running your own blank check company. Hedge fund billionaire Bill Ackman has one a new. Billy Beane, executive of Oakland A, who was played by Brad Pitt in the film Money ball, came into play with an IPO in August. Even former US House Speaker Paul Ryan is get one going.
So what is a blank check? Formally known as the Special Purpose Acquisition Company or SPAC, it is an investment vehicle that goes public despite having no real business. The plan is to raise money from investors and use it to buy into another company, usually a private one, that has yet to be selected. More than 40% of volume IPOs in 2020 were SPACs, grossing $ 31.6 billion, more than double the total prior year volume of $ 12.4 billion. And last year was a record breaker too. “Three to four years ago, SPACs were just a curiosity,” said Niccolo de Masi, chief executive officer of two blank checks, DMY Technology Group Inc. and DMY Technology Group Inc. II, which grossed more than $ 500 million. “Now it’s an option for everyone.”
The blank check boom– or maybe a fad – comes from the collision of two big trends. The first is historically low Interest. With safe bonds that pay less than 1% and stocks to be traded high ratings, more and more investors are willing to park their money with a SPAC, hoping to be lucky with an acquisition that pays off. Second is the long term Private equity boom and Venture capital. Investors who have invested money buying companies over the past decade want to make money by selling them. So there are plenty of companies for SPACs to buy. There is also an old constant: Financiers looking for new ways earn a fee from a transaction.
March’s pandemic-induced market volatility, which made it difficult for conventional companies to go public, helped put SPACs in the spotlight. Getting bought by a SPAC can be an easier way for a private company to go public: it can skip the usual investor pitching roadshow and avoid some of the scrutiny that comes with going public. The online sports betting company DraftKings Inc. was founded in April after a merger with Diamond Eagle Acquisition Corp. $ 3.3 billion deal. As is customary in such “reverse mergers”, SPAC took the name of the company it bought. When Diamond Eagle’s share price soared from around $ 10 per share before the deal was announced in December to a high of $ 43 in June as DraftKings, it helped add to the excitement over blank check deals.
You might not be surprised to learn that there is a Reddit out there blackboard Dedicated to SPAC. The boom has at least one veteran of the industry affected. “We are in a silly season in SPAC country,” says Martin Franklin, who has raised six SPACs in the US and UK since 2006 and has another one on the way. “This is going to end badly.”
Investors seem particularly intrigued by the latest blank checks because they are getting into futuristic businesses. Luminar Technologies Inc., a Peter Thiel-supported company that develops the sensor technology behind driverless cars, announced plans to merge with a SPAC on August 24th. The space tourism company Virgin Galactic Holdings Inc. founded by Richard Branson went Publicity via a blank check in 2019.
But the investors who fund SPACs when they first go public don’t necessarily expect moonshots. Typically these are institutions like hedge funds, and the companies offer them the combination of a relatively small disadvantage with the chance of making a decent profit later on. Blank checks typically go public for $ 10 per share and have 24 months to find a target. If the company doesn’t identify one, it will be liquidated and investors get their money back. Investors can also vote on a deal and have the option of redeeming their shares regardless of the outcome. Because of this, SPACs tend to trade around their $ 10 price until a deal is announced (or sometimes rumored). In addition, first-time investors in a SPAC receive warrants that entitle them to purchase additional shares at a fixed price following an acquisition by the company.
SPACs aren’t risk-free, however – especially if you buy after a deal is announced and the stock has risen above $ 10. And once a deal is made, stocks can fall below that price just as easily as any other stock. Of the 18 companies that went public through SPAC mergers last year, 11 are trading for less than $ 10 per share. SPACs are, in part, a bet on the skills of the sponsors who lead the company in pursuit of a goal – often asset managers or well-known executives.
Even the most prominent sponsors can have flops. As with private equity and hedge funds, one of the best ways to make money with a SPAC is to start one. As part of their compensation for finding a business, sponsors can generally purchase 20% of SPAC stock for a very small amount, typically $ 25,000. You are also offered warrants. This means that in the end they will receive part of the shares in the company that SPAC acquires for very little money. Because their compensation dilutes the value of the stock, it is part of the cost of going public through a SPAC deal and offsetting some of the fees it saves by not going public.
Ackman is taking a different path with its newest SPAC, Pershing Square Tontine Holdings Ltd. In essence, his remuneration only occurs when the merged company trades 20% above the offer price. Pershing Square Tontine is the largest SPAC to date and has raised approximately $ 4 billion. Ackman says he wants to buy a minority stake in a “mature unicorn” – a private company valued at $ 10 billion or more.
According to data from SPAC Research, there are currently 120 SPACs that can spend $ 40 billion. De Masi of DMY Technology predicts that the market will soon split into two categories: some top sponsors who can form attractive mergers and everyone else.
That doesn’t mean the stars don’t have competition. On August 24, four software companies announced plans for traditional IPOs, and another, Asana Inc., announced a direct listing – an initial public offering by making existing private stocks available for trading on exchanges instead of selling new shares. Thiel’s Palantir Technologies Inc. requested a direct listing the next day. Investors could soon find out if SPACs are a new way of doing business or just the newest shiny object in a bull market.