Bringing Private Company Opportunities To Public Investors

The year 2020 was like no other and while many businesses and individuals adapted to a new mode of daily life defined by zoom meetings and ecommerce shopping, investors too found themselves with a new means to participate in business. Over recent decades, there has been a gradual reduction in the number of public companies and hence the number of opportunities for public equity investors, but that has been changing, in part because of SPACs. A SPAC is a Special Purpose Acquisition Company that is publicly listed and founded for the specific purpose of acquiring a private company.

SPACs are actually not a new invention and have been around for decades. In recent years, however, they’ve become popular again as name-brand executives, investors, and even celebrities have jumped in on the trend as “sponsors” seeing an open window to significantly capitalize on their expertise, or popularity, for that matter. Typically, a SPAC’s sponsors will focus on private companies in target sectors in which they have some experience and therefore can create synergies when combining with the management team of the company acquired.

Over 200 SPACs were launched in 2020, holding a combined total of nearly $80 billion in assets. Chamath Palihapitiya, the founder of Social Capital and former Facebook executive, set the trend the year prior, when his SPAC, worth $674 million, merged with Sir Richard Branson’s commercial spaceflight venture, Virgin Galactic. With this move, he struck a match and lit a short wick, as SPAC volume increased by over 400% from 2019 to 2020. DraftKings, the purveyor of online gaming and fantasy sports leagues, went public via a SPAC sponsored by film producer and investor Jeff Sagansky. Since its debut, the company’s stock has risen over 400%, providing more confidence in such daring deals. As the electric vehicle market expands, companies like American EV manufacturer Fisker find the SPAC to be advantageous in keeping up with Tesla and others. The California-based company went public with a SPAC backed by private equity firm Apollo Global Management at a valuation of $2.9 billion.

The SPAC phenomenon is attracting a newly outspoken subset of Wall Street buyers – celebrity investors across all mediums of fame. NBA Hall-of-Famer Shaquille O’Neal, who is no stranger to business and finance, is getting in on the boom with his own Shaq SPAC, Forest Road Acquisition Corp. Along with O’Neal, Martin Luther King III – human rights advocate and businessman – is on the Board of the SPAC, serving as a Director; the two are joined by three former Disney executives, Kevin Mayer, Salil Mehta, and Tom Staggs. If you switch the SPAC channel to baseball, you’ll find Slam Corp., a recently debuted SPAC backed by New York Yankees legend Alex Rodriguez and hedge fund Antara Capital. A-Rod hopes to leverage his celebrity status with his business acumen (and his Yankee fortune) to attract and acquire ventures in the sports, media, entertainment, wellness, and consumer tech sectors, according to its listing documents.

As for the future, although some mergers achieve high returns and success, some SPACs are already walking into shaky territory. Another Tesla rival, Lucid Motors, entered a merger with Churchill Capital Corp IV, managed by well-known investor Michael Klein. The SPAC, the largest of its kind to date, immediately saw a sharp decline of its stock price, fueled by confusion over the EV company’s value. Thus far, about 77% of SPACs have not made it to the merger phase, and those who reach IPO fruition underperform traditional listings, on average. If the sponsors of these SPACs don’t choose their targets wisely, the phenomenon could fizzle out.

Nevertheless, there are many factors that make SPACs an attractive option. SPACs offer increased security for investors, as they can review the final acquisition target and strategy before committing. They also have shorter lifespans and lower associated fees, meaning the up-front commitment may be lower. If the SPAC sponsor is unable to find an investment, the SPAC simply dissolves and investors recoup their investments, minus the already lower fees. With this broad appeal, and with the backing of prominent investors and celebrities, SPACs are likely here to stay, at least for now.

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