IPO vs SPAC
Simply put, an IPO is a company looking for money, while a SPAC* is money looking for a company. While a normal IPO can take up to 18 months to conclude, merging with a SPAC might be possible in less than half that time!
*SPAC= Special Purpose Acquisition Companies
The purpose
The purpose of a SPAC, once incorporated, is two-fold:
Conduct an IPO to raise money in exchange for ownership in the SPAC
Look for a fully operational target company to acquire/merge with within an agreed upon time period
Investor lifecycle
How to invest in a SPAC?
There are three ways to invest in a SPAC:
Sponsor Group- This typically comprises of a small group of investors highly trained in managing companies
SPAC IPO- This is the perfect opportunity for retail investors who would also have the safety net of getting their money back
PIPE (Private Investment in Public Equity)- This opens up an avenue for hedge funds and other institutional investors to participate
Why are SPACs so popular?
David Nussbaum created the SPAC back in 1993. However, it was never a “mainstream” choice for IPOs and M&As in the financial market. So why is it so popular in the pandemic and post-pandemic period?
Downside protection for investors
Upside for sponsors dependent on the success of the target company
Less time to market
Less uncertainty and more transparent pricing
More formal regulation
Author’s opinion
As the advantages of SPACs seem more and more ubiquitous, we need to remind ourselves of the downsides too. The sponsors face execution risk, the investors need to part with their money till a target company is found and the target company faces the risk of investors voting out of the SPAC and going away with their money.
Having said that, SPACs don’t seem to be going out of fashion anytime soon and the Indian regulators should think about allowing them to get listed in India. The first step however, is to change perceptions about shell companies primarily being money-laundering vehicles in India. Let’s see if this change comes from the top down or bottom up. Would you like to invest in SPACs?
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