Distilled Post sits with Kinder’s Ron Razmi, to discuss the exciting 2021 SPAC market.
There’s only one question on every savvy investor’s lips:
Will 2021 be the year that kills the hype around special purpose acquisition companies (SPACs)?
Naysayers, including Goldman Sach’s David Solomon, certainly think so.
On the 19th of January, Soloman gave a speech to analysts that might dampen the hope of SPAC investors. He believes that SPAC could serve as a ‘solid alternative’ to the IPO status quo, but is perhaps too immature an entity to see real traction:
‘The ecosystem is not without its flaws. I think the incentive system is still evolving. One of the things we’re watching very, very closely is the incentives for the sponsors and also the incentives of somebody that’s selling’
Solomon’s scepticism is, of course, the mark of someone who has approached the financial sector with caution – and, on some level, circumspection. Indeed, the finance world needs champions who are in equal parts fastidious and traditional to keep it stable. However, these same individuals doubted the prevalence of digital banks, which have now taken the world by storm. We could perhaps suggest that SPAC cynics are of the mind which dismissed the likes of Monzo or Revolut.
However, if we are to qualify the potential and continued of SPAC investment, we need to understand what investors view as its points for success and major fatal pitfalls.
Low-Risk, High Reward?
In comparison to IPOs, SPACs are so-called “shell” companies formed to targeted and acquire an unspecified company. For many investors, SPACs provide a low-risk entry point to major initial offerings. For sponsors, a SPAC IPO presents a simpler way to raise public equity and funding future M&A activity. Equally, the SPAC structure is attractive to investors because they can be processed and approved in 8 weeks. Further, the SPAC structure is quite attractive to investors as the SPACs sell on the reputation and historical investment successes of those overseeing the SPAC.
Generally, shareholders vote on whether to pursue an acquisition, and individual investors can reject the proposed business acquisition and can redeem their shares for full value. Additionally, if the SPAC cannot target a company in a stipulated time frame, the SPAC vehicle is liquidated, and all funds are returned to shareholders.
The SPAC Catch-22
As with anything in nature, the benefits of SPAC are balanced by its challenges.
Once a company is acquired by the SPAC, regulating commissions do not typically offer grace periods because of compliance. The new company must immediately comply to a wide range of regulatory requirements. It must assume the regulatory profile of the SPAC that has just floated. Chris Wright, Protiviti’s Managing Director elaborates:
‘Two important examples to highlight: 1) the SPAC is not afforded the one-year annual grace period for internal control compliance integration for the acquired entity, and 2) the acquired entity becomes the SEC reporting entity and must follow the rigid filing timelines as set forth by the SEC, with no delay in compliance afforded’
Chris urges those considering SPAC avenues to ‘consider that companies often need 18-24 months to prepare for the transition from a private firm to a public one’. The length of this period allows enterprises to develop and process their functions, which outlap the experiences of smaller, private organisations. The failure to spearhead this transformation can lead to regulatory and shareholder interventions.
Ron Razmi: An Expert’s Opinion on SPAC
In spite of the uncertainty that investors must overcome before pursuing SPAC, the market has seen incandescent levels of activity.
In 2020, SPACInsider reported that these investments raised more than $83 Billion across 248 IPOS. So far, 2021 has seen 27 SPAC IPOs that have generated $6.6 Billion and counting.
Ron Razmi, the CEO of Kinders and SPAC aficionado, is not surprised that SPAC continues to take off. As someone who is involved in a medical-AI SPAC, Ron is well-versed in the integral ongoings of this investment market.
‘If you look at what a SPAC is, it is different in the sense that you go public without having anything. You can take your shell company and relevant documentation to investors to acquire another company, which is typically worth more. You use the money you raise from SPAC to raise additional investment at the time of the acquisition. Because you are already public, that company becomes public through its acquisition’
While some SPACs focus on acquiring a target in a particular industry, Ron reminds us that others have no specific focus and perform a wider search looking for opportunities wherever it may find them. As Ron states, those that do focus on a specific industry, will most likely seek out individuals with significant experience and reputations in those industries:
‘So, really, you’re raising money through the resume of people involved in the SPAC. You’re staking success on the specific expertise of the people involved. Investors look at the wealth of knowledge and experience within the SPAC, and choose to back it. Investing in SPAC is actually an investment in people and what they can bring to an industry, more than anything else’
Will SPACs Survive the Turbulence of 2021?
It looks like the trend towards SPAC IPOs will continue to offer investors some interesting opportunities.
According to NASDAQ, analysts on Wall Street believe expect the SPAC hype to keep expanding. In spite of its reservations, Goldman Sachs predicts a total of $300 billion worth of SPAC merger activity by the end of 2022. David Kostin from the bank explains his viewpoint, saying, ‘Increased retail trading activity has boosted interest in early-stage SPAC targets. SPACs have low opportunity cost for investors when policy rates are near zero’.