The SPAC - Why has it become so popular?

A SPAC, or a Special Purpose Acquisition Company, is a company with no commercial use that is formed to raise capital through a listing on a stock exchange, otherwise known as an IPO. A SPAC has the intention of pursuing deals within certain markets and acquiring stakes in companies.

But, why have we seen an increase in the number of SPACs, and where in the world are we currently seeing the most growth?

According to Bloomberg, in 2014, $679mn was raised through SPACs. Fast-forward to 2020, and $82.1bn was raised - more than the previous 10 years combined! Furthermore, the average size of a SPAC in 2020 was $335mn, more than ten times the amount in 2009.

One of the explanations driving this growth is Pandemic-induced uncertainty in investors. Private firms, in periods of uncertainty, may fear they cannot raise additional rounds of capital from private investors. If this financing is needed urgently, then the business will not take the route of an IPO as this can take 2-3 years to be finalised. Therefore, we have seen the demand for SPACs skyrocket as it is an additional way for a firm to raise the capital they desperately need. After raising money through the SPAC, businesses can use the capital raised to sell a proportion of their company to the SPAC.

Another explanation is that we have seen an increase in the number of high-quality sponsors getting involved with SPACs. These investors have high expertise and sectoral focus, increasing their legitimacy. This helps the SPAC achieve more attention, and therefore, has caused an increase in the number of SPACs that we have seen over recent years.

For example, Bill Ackman, who runs Pershing Square Capital Management, one of the largest American Hedge Funds, is one of the recent big names to get behind this growth in SPACs, launching their own SPAC - Pershing Square Tontine Holdings.

SPAC listings are historically US phenomenon, however, it is rising as a favourable alternative outside the US.

According to the Financial Times, Singapore’s Stock exchange (SGX) is looking to become the first major Asian bourse to allow the listing of SPACs. As the flow of foreign investment into Asian markets has grown exponentially since the beginning of the pandemic, Singapore is looking to capitalise on this.

According to Tan Boon Gin, Chief Executive of SGX’s regulatory unit, the addition of SPAC’s would allow companies to easily raise capital, “benefit(ing) capital markets both locally and regionally”.

The potential of the addition of SPACs to an Asian exchange hopes to capture some of south-east Asia’s unicorns (private companies worth at least $1bn) including companies such as Grab and Gojeck. The vast number of tech start-ups in Asia makes the possibility of SPAC listings very attractive as investors attempt to get a stake in these companies with great potential.

The growth of SPACs in recent years can be attributed to pandemic-induced market volatility, as well as the attractiveness of a shorter preparation period than a traditional IPO. With large investors supporting the adoption of SPACs, they are likely to continue to increase in popularity. However, whether its growth will maintain the rapid pace we have seen this year is not necessarily guaranteed and only time will tell.