The hottest thing in finance is four letters long. Former NBA star Shaquille O’Neal has one. So does former House Speaker Paul Ryan. The same goes for silver-haired hedge fund billionaire William Ackman.
It is called a SPAC, and it is increasingly the favorite source of funding for private companies that want to appear on the stock market. Richard Branson, the space exploration firm Virgin Galactic Holdings Inc., was launched by a SPAC in 2019, and the sports betting firm DraftKings Inc. did it last year. Nearly 300 SPACs are now seeking transactions, armed with about $ 90 billion in cash. And more starts with a furious cut – so far this year, an average of five new SPACs have been introduced every workday.
“If you do not have your own SPAC, you are nobody,” said Peter Atwater, founder of research firm Financial Insyghts.
SPACs, which stand for specialty procurement companies, are essentially large pools of cash listed on a stock exchange. Their goal is to find a private company, buy it and advertise it quickly. Some people on Wall Street call them ‘blank-check companies’ because the investors who support the SPAC raised their money months before an acquisition target was identified, and trust that the people running the show will find a good price. .
These deals arouse a lot of interest because they deliver big pay days for their creators, make it easier for startups in hot industries like electric vehicles to capitalize in a frothy run-up to the stock market and offer everyday investors a new path to hot stocks. When a SPAC buys a business, it merges with it in a kind of accelerated IPO process – a so-called ‘reverse merger’ – while bypassing the normal investigation that an IPO receives.