Special purpose acquisition companies, or SPACs, are quickly becoming a “favorite source of financing for private companies looking to go public,” according to a recent article in The Wall Street Journal.
The article describes SPACs as “big pools of cash listed on an exchange,” citing a recent example of Richard Branson’s space-exploration firm Virgin Galactic Holdings Inc. (that went public via SPAC in 2019). The article reports that nearly 300 SPACs “are now seeking deals, armed with about $90 billion in cash. And more are rolling out at a furious clip,” adding that so far this year five new SPACs have launched each business day.
According to Peter Atwater, founder of research firm Financial Insyghts, “If you don’t have your own SPAC, you’re nobody.”
Some Wall Streeters consider SPACs “blank-check companies” because backers invest money months before an acquisition target is even identified, “trusting the people running the show to find a good deal.” It also reports that SPACs generate big paydays for their creators while making it easier for hot startups to “capitalize on a frothy run-up in the stock market and offer everyday investors a new path to a hot stock.”
But some warn that the excitement could “be part of a bubble that overvalues nascent companies,” the article says, noting that a burst could leave a few winners but big losses for others, citing a recent warning from Goldman CEO David Solomon that all the hubbub isn’t sustainable.
For now, however, “there is no end in sight to the SPAC attack,” the article reports, “which coincides with a vast run-up in risky investments that has everything from U.S. technology stocks to bitcoin soaring.” Citing data from the firm SPAC Research, the article notes that many of the 287 SPACs currently looking for deals are targeting “hot” sectors like tech or electric vehicles–and analysts say this will translate into deals adding up to several hundred billion dollars in the coming months.
“When a SPAC is launched,” the article concludes, “it has to merge with a target within two years, so the effects of this wave will continue for a while.”