Blank-cheque companies, also known as special purpose acquisition companies (SPACs), were created in the 1990s but have seen a ten-fold rise in investment inflows since 2019, with globally recognised investors such as SoftBank Group launching their own entities to invest in tech start-ups, cementing their popularity.
Saudi Arabia's Public Investment Fund-backed Lucid Motors announced it would go public by merging with Churchill Capital IV Corporation SPAC, while music streaming service Anghami on Wednesday said it would list on the Nasdaq through a merger with Vistas Media Acquisition Company.
Here's a quick rundown on the rising significance of SPACs for venture-back firms, what they are and how they create value for investors and businesses looking to raise funds.
What is a SPAC?
A SPAC is a company with no commercial operations and trades without business fundamentals. It is formed with the intention of raising funds through an initial public offering and seeks to acquire an existing company.
Who invests in a SPAC?
SPACs are usually formed by investors or sponsors. They could be private equity funds or investors specialising in a particular industry and intend to pursue deals in that area of business. Investors in SPAC IPOs can be other funds, high-net-worth individuals or the general public.
Sponsors of a SPAC may have a target company in their sights when they form a blank-cheque company. However, investors in the blank-cheque company’s IPO usually do not know it until a deal is announced. SPACs usually have two-year life span. They have to finalise a deal within that time frame and if they fail, they have to return funds to investors. The IPO proceeds are kept in an interest-bearing account and cannot be disbursed unless it is to fund an acquisition.
What is the purpose of setting up a SPAC?
SPACs are formed to create a merger, a share exchange, particular asset acquisition, purchase of shares, reorganisation or combination of one or more businesses or entities.
Rising popularity of SPACs
Although SPACs have been around for a long time, they have become popular in recent years and have attracted the big name investors. SPACs raised more than $83 billion last year alone, according to Bloomberg data.
SPACs allow companies to become publicly traded entities. They have lower transaction fees, a faster timeline than the traditional public offerings and provide companies with access to capital when liquidity might be limited due to market volatility or other conditions.
Merging with a SPAC also means less volatility for a company that would otherwise face volatility in its share price and allows a company to negotiate and lock in a price with the SPAC sponsor, which reduces uncertainty.
Funding avenues for venture-backed businesses
SPACs have opened up new avenues of funding for start-ups that may, or may not, have a track record that qualifies them to become a publicly traded company. These companies usually rely on venture capital firms or strategic investors to secure growth capital, however, SPACs provide them with another funding option. Listed companies can subsequently carry out further capital market transactions to raise additional funds.
Joining the SPAC rush
Last week, the UK said it is looking to reform its stock exchange rules around blank-cheque firms as part of wide-ranging changes to boost the attractiveness of London after Brexit, Bloomberg reported, citing a state-backed report. Chancellor of the Exchequer Rishi Sunak said the government will act quickly on the proposals to boost London’s standing among investors.