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Understanding the Rise of the SPAC Finance Trend

In Finance
May 21, 2022
SPAC Finance Trend

Did you know that last year three hundred and eleven companies went public in the United States? The success of an IPO, or initial public offering, often depends entirely on how much money it can raise.

That’s why Wall Street professionals and institutional investors often utilize something known as a SPAC to raise money. But, exactly what is a SPAC? And why is the SPAC finance trend so popular lately?

If you want to know the answer to these questions, and more, you’re in the right place. In this guide, we’ll give you a crash course in everything you need to know about this current financial trend. Let’s get started!

What is an SPV?

Many people often confuse a SPAC with an SPV. So, let’s get the difference out of the way right now. Every SPAC is considered an SPV. However, not every SPV is considered a SPAC.

A special purpose vehicle is typically formed as an LLC or limited partnership in a way that isolates any potential financial risk. This is helpful, because if an individual investor goes bankrupt, then the SPV is still capable of maintaining its obligations.

The most common purpose of an SPV is to aggregate money. Make sure to check out this guide if you want to learn more about the way a special purpose vehicle works.

What is a SPAC?

SPAC is an acronym that stands for special purpose acquisition companies. A SPAC is a shell company that’s started by investors with the singular goal of raising money during an IPO.

This is done so that they can eventually acquire a separate company. This is why they’re often known as blank check companies. It’s important to note that a special purpose acquisition company doesn’t have any commercial operations.

That means it doesn’t have any products under its brand, nor does it sell any services.

The only assets that a SPAC possesses are the funds that they raise during the IPO. Let’s take a closer look at how they get started and what they do when operating.

How Does a SPAC Work?

A SPAC is either created or sponsored by a team of institutional professionals. This can include people like Wallstreet investors from the world of hedge funds or private equity.

It could also include high-profile entrepreneurs like Mark Cuban or Richard Branson. The people starting the SPAC are very important. Why?

Because anyone who puts money into the IPO doesn’t know what company is going to be the eventual target of the acquisition. They’re betting on the unknown and hoping that the investors have a good eye.

That’s why it’s so important for investors to have a track record of success under their belts. No one wants to take a chance like this on a complete unknown with no prior SPAC experience.

When the SPAC finally raises enough money through its IPO, it’ll find a safe place to store the money. Typically, this is an interest-bearing trust account.

Then, they’ll start looking for a currently private company but want to go public through an acquisition. For the acquisition to go through all of the shareholders need to vote to approve the deal.

From there, SPAC investors have two choices. They can either redeem their SPAC shares to get back their investment, along with any interest from the trust. Or, they can swap their shares for shares with the new company.

However, all SPACs must come with a deadline. Typically, it’s two years after the company goes public. If they don’t find a deal at this time, then the company will be liquidated.

Why is SPAC Financing Trending Right Now?

SPAC has been in use for decades. In the past, they were only used by small companies that would have had trouble getting the money together on the open market. So, why of a sudden are they popular?

The answer lies in the global pandemic. The pandemic caused extreme market volatility. That means that many companies decided to postpone their IPO so that the volatility didn’t hurt their stock prices.

This created a fertile ground for companies that want to take alternative finance options to get to an IPO through the merger of another company.

Since a SPAC acquisition is quicker than a conventional IPO this can be an attractive option for many companies.

What Are the Risks of a SPAC?

Sadly, there are risks for everyone involved in the SPAC. If you’re the company being targeted by the SPAC, then there’s always a chance that the shareholders won’t approve of the acquisition.

For investors, the lack of transparency is a very real concern. With a SPAC you’re going in completely blind. Often, investors like to think that their team’s track record will ensure they find a good deal.

However, because time is so limited (around two years), this might not be the case. Often investors are so pressed for time that they’re looking for the quickest deal, not necessarily the best.

Appreciate Learning About SPAC Finance Trends? Keep Reading

We hope this article helped you learn more about SPAC finance trends. As you can see, there is evidence that a SPAC can raise the price of a stock after it goes public.

That being said, this has mainly been confined to high-profile SPACs. The average SPAC merger process often fell short in terms of average returns.

So, we urge caution before you decide to put your money into this type of acquisition company. Did you learn something from this article? If you want more educational content just like it, then continue exploring our website.