Special Purpose Acquisition Companies (SPACS): A Viable Choice of Investment or Fluke? – Tim Bellamy (10/07/2020)

SPACs are growing very famous in the financial investment space around the globe. The rate of investment in SPACs is now spiking, and this new development is quite fascinating. This article is set to answer your many questions on SPACs and the big question of whether or not it is a viable space to explore as an investor.

What are SPACs and how do they Work?

Special Purpose Acquisition Companies (SPACs) are public entities, also called blank-check companies. These companies lack business operations, and they make money through an Initial public offering (IPO). With funds raised from IPO, a SPAC can acquire any private company through a merger.

Here is the summary of the relationship: A private company wants to go public for more capital base to increase operations and productivity but needs a merger to make that happen. SPACs being public entities, make enough money, and then acquire these companies. Since they do not previously have any commercial operation, they use IPOs to raise their funds.

As simple as the whole process sounds, it might take up to two years for a SPAC to form a successful merger. It is possible to have an unsuccessful run, and this might result in the eventual loss of investments. A SPAC might also be unable to get a private firm to form a merger after the IPO.

There are certain cases where after the public offering and investors have their money in a SPAC IPO, a merger might not come through in time. At times like this, investors have to earn dividends on their shares regardless of the situation at hand. The SPAC would invest the funds raised in a trust before a merger comes through.

Asides earning dividend and interest as an investor, stockholders also form a crucial part of the SPAC corporation’s decision-making body. They can vote on important decisions such as what business combination to approve or the kind of deals to make. The SPAC is obligated to fully disclose all of its running to all stockholders.

While stockholders may have decision-making rights, they may not necessarily have a place in the managerial board. Management of SPAC is often run by experienced and skilled personnel or members with professionalism in private equity, financial investments, or mergers and acquisition. The management team has a claim on 20% of the equity at the public offering, exclusive of warrant value.

It’s not all bed of roses with SPAC IPOs. As good as the statistics look, only a few of these IPOs make the bulk of revenue publicized. The larger percentage of SPAC raises the least of the bulk revenue of SPACs reported annually. This means a lot of SPACs go under, and this you should know as a potential investor.

One of the reasons SPAC IPOs do not end up successful even after a merger is lack of procedure. SPACs provide a fast route or backdoor to legally go public without due scrutiny. While this might save cost and look enticing, it also posts risk from lack of proper structure and background or foundational works; which is important for any business. 

As an investor, you may not like to have your investments in a company struggling at the risk of liquidation. Several SPACs have gone down in history for lack of an appropriate merger. This challenge has made investors thread with caution, and it has not particularly been to the advantage of the SPAC community.

The solution to the problem of investment came with the ETF. Considering the attention SPACs are getting, and how the concept is fast rising and getting popular, it isn’t surprising that they have acquired their own ETF on this space. An Exchange Traded Fund is almost always associated with such themes getting recognized in the financial world. 

The first and newest SPAC ETF is the Defiance NextGen Derived SPAC ETF, which came at a significant time when SPACs made a groundbreaking revenue acquisition record. “116 initial public offerings have raised nearly $44 billion in proceeds—more than the past five years combined, according to data from SPAC Insider”, says Barrons. A success of this weight will have ETFs potential involvement.

The new traded fund tracks the performance Index SPAC and NextGen IPO Index. The debut of this ETF on the New York Stock Exchange was under the symbol identifier called SPAK. The fund, however, doesn’t give an accurate representation of the entirety of the SPAC population.

In reality, this fund helps investors make an informed decision on what SPAC to invest on. However, investors might not have full info on the entire SPAC population because it comprises SPACs at the post-merger stage. Other SPACs at the sourcing stage only make up the minority.

According to Barrons, “Some of 2020’s best-performing stocks were the result of SPAC mergers. Those include Virgin Galactic (SPCE), DraftKings (DKNG), and until recently Nikola (NKLA). The first two are among the SPAK ETF’s top holdings, along with Clarivate (CCC), Vertiv Holdings (VRT), Vivint Smart Home (VVNT), and Open Lending (LPRO).” 

With the new defiance SPAC ETF, investors are exposed to SPACs that are doing well (since they make up 80% of the index). The funds tilt towards blank-check companies that are performing and have gone public through mergers. It lacks the most controversial post-SPACs organizations, and it appears to be a deliberate effort to serve investors the best.

By easing the daunting decision-making process of stock investment, SPAK brings a new future to SPAC IPOs. The reasonable pricing per annum of SPAK stocks is also an advantage to top the course. Typically, SPAK prices at about 0.45% per year, which is a fee fair enough to attract investors. 

Trading of SPAK is projected to drive SPAC into a realm of global domination in almost all sectors, including technology, health, and sport. Other ETFs are expected to emerge in the coming years following the first. If your question as an investor is on viability and profitability, you just may have your answers in a carefully selected SPAC IPO. 

-Tim



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