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  • Imagine someone famous asking  you to invest in a company.

  • Chances are, you will want to know more.

  • As it turns out, there is no company, at least not yet.

  • Will you part with your money?

  • That is the pitch by owners of SPACs, or  special purpose acquisition companies,

  • which is arguably the hottest asset class in the  U.S. of late, led by notable investors such as

  • hedge fund billionaire Bill Ackman and former  Facebook executive Chamath Palihapitiya.

  • We're getting a lot of questions about SPACs this week.

  • SPACs this year have raised triple the  amount that they did in all of 2019.

  • With companies slashing dividends and interest rates at rock bottom levels, investors are flocking to SPACs.

  • So what exactly are SPACs, and why are they so popular?

  • Once shunned by investors, SPACs, also known  as blank check companies, have become an

  • increasingly popular method in recent years  to list companies on a stock exchange.

  • SPACs are shell companies with no actual  commercial operations but are created solely

  • for raising capital through an initial public  offeringor IPOto acquire a private company.

  • This is done by selling common stockwith shares  commonly sold at $10 apieceand a warrant,

  • which gives investors the preference to  buy more stock later at a fixed price.

  • Once the funds are raised, they will be kept  in a trust until one of two things happen.

  • First, the management team of a SPACalso  known as sponsorsidentifies a company of interest,

  • which will then be taken public through an acquisitionusing the capital raised in the IPO.

  • Or second, if the SPAC fails to merge or  acquire a company within a deadline

  • typically two yearsthe SPAC will be liquidatedand investors get their money back.

  • SPACs have existed in one form or another as early as the 1990s, typically as a last resort for smaller companies to go public.

  • The number of SPAC IPOs has waxed and waned over  the years in tandem with the economic cycles,

  • and they have been making a resurgence of late.

  • Notable SPACs include Palihapitiya's  Social Capital Hedosophia Holdings,

  • which acquired a 49% stake in British  spaceflight company Virgin Galactic in 2019.

  • The biggest SPAC on record raised $4 billion in July 2020,

  • led by hedge fund manager Bill Ackman's  Pershing Square Tontine Holdings.

  • The structure of SPACs allows investors  to contribute money towards a fund

  • without any knowledge of how their capital will  be used, thus the term 'blank-check companies'.

  • But what's the difference betweenSPAC IPO, and a traditional one?

  • There are several waysprivate company can go public.

  • The most common route is through a traditional IPO,

  • where it's subject to regulatory and investor  scrutiny of its audited financial statements.

  • An investment bank is usually hired  by the company to underwrite the IPO,

  • which usually takes 4-6 months to complete.

  • This involves roadshows and pitch  meetings between company executives  

  • and potential investors to drum up  interest and demand in its shares.

  • And not all IPOs succeed.

  • Co-working-space company WeWork withdrew its  high-profile IPO in 2019 amid weak demand  

  • for its shares after massive losses and  leadership controversies were revealed.

  • Other companies such as Spotify and Slack went  public through direct listings, saving on fees

  • paid to middlemen such as investment banksalthough there are more risks involved.

  • And while private companies listed through  SPACs are similar to reverse takeovers,  

  • such as the case for insolvent fintech company Wirecard,  

  • they are different in that SPACs start off  on a clean slate and have lower risks.

  • Because SPACs are nothing more but shell  companies, their track records depend on the

  • reputation of the management teams.

  • By skipping the roadshow process, SPAC IPOs also typically list in a much shorter time.

  • This has led some investors to become wary of  buying shares in companies listed through SPACs  

  • due to the lack of scrutiny compared to traditional IPOs.

  • SPAC sponsors also typically receive 20% of founder shares in the company at a heavily discounted price,

  • also known as thepromote.”

  • This essentially dilutes the ownership of public shareholders.

  • For example, initial shareholders of Palihapitiya's Social Capital got 20% of the company at $0.002 cent,

  • while public shareholders got the remaining 80% at $10 a share.

  • But how have SPACs fared in equity marketsespecially for ordinary investors?

  • A study of 56 SPACs that completed acquisitions  or mergers since the start of 2018 found that

  • they tend to underperform the S&P 500 during a threesix and 12-month period after the transaction.

  • A separate study of blank-check companies  in the U.S. organized between 2015 and 2019  

  • found that the majority are trading below  the standard price of $10 per share.

  • Between 2017 and the middle of 2019, there  were slightly over 100 SPACs in the U.S.,  

  • with an average return of a mere 2%.

  • If there's one thing that markets hate, that's uncertainty.

  • Even before the pandemicSPACs were already on the rise, buoyed by the equity boom and hot IPO market in 2019.

  • While the pandemic has slowed the pipeline of  traditional IPOs, SPACs have bucked the trend.

  • With the quality of management teams  improving, fewer disclosure requirements  

  • and a relatively straightforward listing  process, blank check companies are booming.

  • In fact, funds raised through SPACs outpaced traditional IPOs in August — a rarity on Wall Street.

  • In the first ten months of 2020, there were 165 SPACs IPOs globally, of which 96% of them were listed in the U.S.

  • That is nearly double the number of global SPACs  issued in 2019 and five times that of 2015.

  • Of the $56 billion poured into global SPAC  listings in 2020, 99% was raised in the U.S.,  

  • and that figure is nearly 12 times the amount  raised globally in 2015 over the same period.

  • While largely an American phenomenonSPACs have caught the attention of investors in other jurisdictions.

  • In 2018, Antony Leung, the former finance  secretary of Hong Kong, raised $1.5 billion on the  

  • New York Stock Exchange through his SPAC, which  bought a mainland hospital chain a year later.

  • Other players include Masayoshi Son's SoftBank,  

  • and the investment arm of Chinese  state-owned conglomerate CITIC Group.

  • Despite having sponsors from Asia looking  to acquire international companies,

  • these SPACs are ultimately listed in the U.S.

  • It's a similar story in Europe, which  has seen muted SPAC activity.

  • For example, the management team of blank check company Broadstone Acquisition Corp is based in London,

  • targeting private companies in the U.K. and Europe, but is listed on the New York Stock Exchange.

  • One main reason is the different  rules for SPACs across jurisdictions.

  • In the U.S., investors can vote to  approve the acquisition the SPAC proposes,

  • or redeem their funds if they do not support the proposed deal.

  • This, however, isn't a requirement in some  European jurisdictions, including the U.K.

  • There is also a lock-in period for British investors once an acquisition is announced until the approval of the prospectus,

  • which ties them into deals that they may  not support in that indefinite period.

  • But changes may be afoot.

  • As SPAC activity reaches fever pitch in the U.S., regulators are putting these blank check companies under the microscope.

  • Competition to the IPO process is probably  a good thing, but for good competition and

  • good decision-making, you need good information.

  • And one of the areas in the SPAC space  that I'm particularly focused on is

  • incentives and compensation to the SPAC sponsors.

  • However, investors like Palihapitiya have  defended SPACs transactions, saying that they

  • are no different from the fees that banks  collect in a traditional IPO process.

  • As more ordinary investors jump on the  SPAC bandwagon, experts are concerned

  • that this will overheat markets and  affect any fragile economic recovery.

  • While SPACs provide a straightforward route  to invest through a trusted intermediary,  

  • its performance so far means that it is  a dicey bet for ordinary investors.

  • Hi, guys. What's your thoughts on SPACs? Would you invest in one?

  • Drop your comments, and don't forget to subscribe.

  • In the meantime, thanks for watching, stay safe.

Imagine someone famous asking  you to invest in a company.

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B1 ipo company raised blank acquisition listed

What is a SPAC? | CNBC Explains

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    Summer posted on 2020/11/10
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