Why SPAC are lucrative for investors

Special-Purpose Acquisition Companies have a number of benefits that have led private investors and PE-firms to use SPAC to raise capital.

A SPAC offers the sponsor with shares at a substantial discount to the IPO with the liquidity of the public capital markets.

Private equity firms, are attracted to SPACs because they require a relatively low percentage, upfront investment, with a relatively large upside potential, as well as a comparatively shorter investment time horizon than traditional private equtiy investments.

In short, SPAC’s offer unique investment advantages for a sponsor investor. That’s precisely why so many wealthy individuals invest in SPACs. Where can you invest in an IPO at a substantial discount?

There are numerous benefits in a SPAC to the Sponsor:

Investors in a SPAC prior to an IPO are called Sponsors; Those Sponsors either use their own capital or raise outside capital to fund what we call “at-risk-capital”. This capital will be used to pay all the expenses the SPAC will spend prior to acquiring a target, including legal fees, underwriting fees, working capital, accounting, etc.
This is a significant change to earlier periods of old-fashioned blank-cheque companies, when all those fees have been paid out of the IPO proceeds. In exchange for their investment, the Sponsors will receive a unit which is a combination of so-called “founders shares” and “founders warrants”.

And, there are other advantages:

  • SPAC provide a potential permanent capital solution for sponsors through access to public markets, which allows for more open-ended private equity investments.

  • The private equity sponsor retains 20% of the post-IPO SPAC, providing an outright ownership position, which increases the potential upside in the post-business combination entity.

  • SPAC can serve as co-investment vehicles, allowing private equity sponsors to do side-by-side transactions with less leverage and more equity.

  • SPAC allow the pursuit of larger acquisition targets and targets in industries that fund documents would prohibit.

  • SPAC provide greater liquidity for sellers who receive SPAC equity in the transaction, as compared to an illiquid interest in a private portfolio company

  • Sponsors receive a large protion of the SPAC’s equity at a significant discount in return on their investment.

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SPACs are lucrative for Sponsors

02

SPACs provide access to public markets

03

SPACs provide liquidity

04

Increasing the upside

05

SPACs are enableing large acquisitions

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Side-by-side transactions with SPACs

You are considering to launch your own SPAC?

Advantage of SPAC over tradtional IPO and RTO

In comparison to a traditional IPO or RTO, some of the key advantages in a SPAC reverse merger transaction become clear:

Reverse mergers are usually cheaper and faster than traditional IPO. Special-purpose Acquisition Companies have even greater advantages than a conventional reverse merger: In a SPAC transaction, the money has already been raised by the underwriters and is secured and interest-bearing in a trust account reserved for the transaction.

With a traditional IPO, timing is everything! Missing the right IPO window, a bad day on the stock market, market distractions due to external factors can make the difference between a successful „pop“ and a failed IPO. Even the definition of a SPAC ensures that the IPO window is open for the SPAC IPO. The SPAC market is almost always active and at current we are experiencing this particularly as financial instability and macro shocks have closed the window for traditional IPOs.

The risk of not being able to raise capital through institutional investors or to change the price of the offering is eliminated with a SPAC IPO.

Special-Purpose Acquisition Companies are newly incorporated without tainted history of many previously-reporting companies in a RTO: there is no drama, cost and headache of cleaning a previous shell corporation. A new incorporated shell insures complete control over the cleanliness of the corporation and excelerates the auditing before the SPAC IPO.

Traditional IPO loose 38% of their capitalization

Evaporation of IPO investments

The traditional way of going public is systematically broken and is taking billions
of dollars from investors each year.

This problem is getting worse every year:

Year
Number of IPO
Underpriced on Day 1
Accumulated Underpricing in million USD
1980 – 2019
8,610
20.7%
189,000
2016
75
16.6%
2,070
2017
107
15.0%
4,240
2018
134
21.4%
7,350
2019
112
27.0%
7,970
2020 (YTD)
58
31.0%
7,800

An average company that has gone public in a tradtional IPO in 2020 was underpriced by 31%.

This  31% cost of capital plus 7% IPO fees equates to loss of capitalization of 38% in total.

So the total dollars of one-day wealth transfer in just 6 months of 2020 was $7.8B. This is way worse than any given year prior in absolute dollars. If it stays at this level, 2020 IPO underpricing will transfer wealth of fifteen billion dollars in give-aways to Wall Street investment firms and their clients on one single day!

Your Benefits

  • Side-by-side transactions
  • Access to public markets
  • SPAC provide liquidity
  • Increasing the upside
  • Enable large acquisitions
  • The investment in the private placement is very lucrative for the investors
  • SPAC provide a potential permanent capital solution for sponsors through access to public markets, which allows for more open-ended private equity investments.

  • The private equity sponsor retains 20% of the post-IPO SPAC, providing an outright ownership position, which increases the potential upside in the post-business combination entity.

  • SPAC can serve as co-investment vehicles, allowing private equity sponsors to do side-by-side transactions with less leverage and more equity.

  • SPAC allow the pursuit of larger acquisition targets and targets in industries that fund documents would prohibit.

  • SPAC provide greater liquidity for sellers who receive SPAC equity in the transaction, as compared to an illiquid interest in a private portfolio company

Your Consultants

Alexander V. Schinzing
Managing Director
Greg Gaylor
Principal Associate
Celtic Asset & Equity Partners Resources to Bring Ideas to Life
In every Special-Purpose Acquisition Company we create, we are co-partnering together with our clients. Our success and our compensation depends on a positive execution of each SPAC: We trust in our competencies and those of our clients.