How to invest in SPAC?

SPAC stands for Special Purpose Acquisition Company, also known as a blank-check company. It is a type of investment vehicle that raises money through an initial public offering (IPO) with the sole purpose of acquiring a private company within 18 to 23 months.

SPACs have become popular in recent years as an alternative to traditional IPOs for private companies looking to go public for several reasons – SPACs offer a faster and more streamlined path to going public, and they allow private companies to bypass some of the regulatory requirements and scrutiny involved in a traditional IPO.

How do SPACs work

In a nutshell, here’s how SPACs work:

After the SPAC goes public, it holds the money raised in a trust account until it identifies a private company to acquire. Once a target company is identified, the SPAC merges with the private company, and the private company becomes a publicly-traded company through the acquisition.

We shared an in-depth example of How SPACs work previously.

Investors in a SPAC typically buy shares at the IPO price. SPACs trade like stocks in the market and if you end up not liking the acquisition target, you can simply sell off your shares. If the acquisition is successful, your shares will be converted to shares of the newly public company.

What are the different roles in a SPAC?

Investors

That’s us.

We provide the capital that the SPAC uses to acquire a target company. As shareholders, we have the rights to approve or reject a proposed acquisition. Oftentimes, if you disapprove, you will be given the option to redeem your shares for a pro-rata share of the trust account’s assets.

You can also choose to sell your SPAC shares in the open market.

Targets

Targets are private companies that are acquired by the SPAC. These are usually high growth companies that have not gone public yet. SPACs give investors like us an opportunity to own potential unicorns early.

How to invest in SPACs?

For those of you who are wondering how SPACs investing feels like, here’s a step-by-step guide to investing in a SPAC:

Research SPACs: Start by researching SPACs that are currently available for investment. You can find information on SPACs by reading financial news, investment websites, and other reliable sources.
Evaluate SPACs: Once you’ve identified a few SPACs that interest you, evaluate them based on criteria such as the sponsor’s track record, financial strength, and transparency. Consider how well the SPAC’s target company aligns with your investment goals and risk tolerance.
Open a brokerage account that gives you access to SPACs: To invest in a SPAC, you’ll need to open a brokerage account with a firm that offers SPAC investments.
Buy SPAC shares: Once you’ve identified a SPAC that you want to invest in, you can buy shares through your brokerage account. This typically involves placing an order to purchase shares in the SPAC at the current market price, or joining in the SPAC’s IPO process.
Monitor the SPAC: After you’ve invested in a SPAC, you’ll need to monitor its progress closely. Stay up-to-date on any news or developments related to the SPAC and its target company, and evaluate whether any changes to your investment strategy are necessary.
Approve the acquisition: If the SPAC identifies a target company and proposes an acquisition, you will be given the opportunity to approve or reject the acquisition. If you approve the acquisition, your shares will automatically convert to shares in the target company.
Manage your investment: After the acquisition is completed, you’ll own shares in the target company. But it doesn’t end here, you need to continue to monitor the company’s performance and manage your investment based on your goals and risk tolerance.

How to evaluate a SPAC sponsor?

As mentioned above, SPACs are also known as “blank cheque companies”. This means that you’re giving up control of your capital to the sponsor of the SPAC when you decide to invest.

Hence, when it comes to investing in SPACs, you’re basically selecting them based on the sponsors’ track record and reputation.

Here are 6 key factors to consider when evaluating a SPAC sponsor:

Relevant experience: Look for sponsors with relevant experience in the industry or sector that the SPAC is targeting. Sponsors with a track record of successful acquisitions in the target industry are more likely to identify high-quality acquisition targets and create value for shareholders.
Financial strength: Evaluate the sponsor’s financial strength and ability to fund the SPAC’s operations. Sponsors with strong financial backing are better positioned to navigate challenges and support the SPAC’s success.
Reputation and credibility: Consider the sponsor’s reputation and credibility in the investment community. Sponsors with a strong track record of ethical and transparent business practices are more likely to act in the best interests of shareholders.
Alignment of interests: Look for sponsors with a significant financial stake in the SPAC. Sponsors with a substantial investment in the SPAC have a strong incentive to create value for shareholders.
Transparency and communication: Evaluate the sponsor’s transparency and communication with investors. Look for sponsors who are transparent about their investment strategies, risks, and fees, and who communicate regularly with shareholders.
Performance history: Consider the sponsor’s performance history with previous SPACs. Sponsors with a successful track record of creating value for shareholders in previous SPACs are more likely to do so again in the current SPAC.

Risks of investing in SPACs

Investing in SPACs comes with its unique risks. Here’re some you should take note of:

Lack of clarity on the acquisition target: When a SPAC goes public, it does not have a specific target in mind for acquisition. This means that investors do not know exactly what they are investing in and may not have a clear understanding of the potential risks and rewards of the investment.
Uncertainty around the acquisition process: Even after a target is identified, there is no guarantee that the acquisition will be successful. The SPAC may have to negotiate terms with the target company, and the target company may decide not to move forward with the acquisition.
Limited control over the acquisition target: Investors in a SPAC have no say in the target company that the SPAC acquires. This means that they may not agree with the target company’s business strategy, management team, or financial performance.
Lack of operating history: Because SPACs are newly created entities, they have no operating history, which can make it difficult to evaluate the management team’s ability to execute the acquisition strategy.
Price volatility: SPAC shares can be volatile, especially in the period between the announcement of the acquisition target and the completion of the acquisition. This volatility can lead to significant losses for investors.

Conclusion

While SPACs have become an increasingly popular investment vehicle that allow retail investors to gain access to high-growth private companies that are otherwise difficult to access, investing in SPACs can be risky.

It’s important to carefully evaluate the SPAC’s sponsor, track record, financial strength, and transparency before investing. You should also monitor the SPAC’s progress closely and manage their investment based on their goals and risk tolerance.

Quick note: If researching and investing in individual SPACs sound too complex to you, SPAC ETFs are a good alternative to consider. However, you should note that you will not own shares in the new company if you invest via SPAC ETFs. If your aim is to get early access to private company equity through SPACs, ETFs are not for you.