A SPAC, or special-purpose acquisition company, is a blank-check company with the purpose of raising capital to merge with a private business. The only asset these companies contain is the capital raised as they have no service or product to provide. These are often created by institutional investors, especially private equity firms, who bring experience that leads to people buying the SPAC. This plays an important role because retail investors, most of the time, don’t know exactly what private company they will invest in when they put their money into a SPAC. The acquisition companies have targets in mind, but those aren’t released to the public, which makes institutional backing important. When a merger occurs, the SPAC sponsors often get a 20 percent stake in the company, and retail investors who bought the SPAC can swap their shares for the merged company or redeem their investment back with the interest it has gained. Interest? Yes, the funds the SPAC raises goes into an interest-bearing trust, which provides a benefit to investors. Certain companies prefer SPACs instead of IPOs because it’s quicker, and the company can get capital much faster.
Recently, the SPAC market has been doing terribly. One metric showing this is CNBCs SPAC Post Deal Index, which tracks SPACs. The index has fallen near 50% this year which is double what the S&P 500′s declined in 2022. The reason for this is that SPACs are high risk investments that are also new and have little room for growth in the bear market. With few investors and minimal appetite for risk, it wouldn’t be surprising if SPACs fell even further.
What do you think about SPACs and do they have a chance at recovery over the next few months?
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.