SPACs to Keep an Eye On

Jeffrey Maddox

September 5, 2022


The number of SPACs that want to buy targets has increased, making the playing field more crowded, but the demand for targets is still high. Investors want to know how long the merger activity will last. Even if the return on a high-quality SPAC six months after the merger is less than $10, it can still be a good investment. SPACs will be the ones to watch if they can keep up the hype and make high returns over time.

SPACs are ways to go public that are faster and easier

Going public through SPACs is easier than going public through an IPO. They must spend at least 80% of their money on one deal, be separate from management, and have directors who are also separate from management. That makes it hard for some businesses to meet the requirements.

SPACs, on the other hand, do have a lot to offer companies that are ready to go public. Even though SPACs are not as strict as an IPO, they can still give investors a lot of value. This can make investors nervous about putting money into a company that might not be doing well financially.

They cut down on conflicts of interest

SPACs are also better than IPOs because they happen faster. If a private company wants to go public, it can either choose a SPAC or merge with one. Most of the time, this process is faster and costs less than a traditional IPO. SPACs still have a lot of risks, though. Because of this, SPACs need to be carefully thought out. At each stage of their lives, they need to get the right insurance. SPACs can benefit from insurance if they have the right advisors.

There are a number of important parts of SPAs that need to be followed to keep conflicts of interest to a minimum. Among these are outside activities, money-related interests, and relationships. SPAC Management plans can also be used to reduce the chances of conflict, in addition to these things. Some of these things could be

They have higher returns six months after a merger

A company like this has less dilution because its shares are worth $7 or less per $10 share. But a lot of good SPACs still lose money. Even though these companies are less volatile than SPACs with lower quality, they may be able to get more from their targets.

The SEC’s hard stance against SPACs isn’t likely to fix problems with the market’s structure. Even though many firms, like Goldman Sachs, have left the SPAC market, others are still there. Goldman Sachs has already backed two deals in 2017 and did not want to say anything about it. Still, these steps aren’t likely to fix the structural problems in the SPAC market, since the firm only pays $25,000 for 20% of an IPO. This makes it worth it to do a deal, even if the merged company goes bankrupt.

They can be redeemed less often

In the past few years, redemption rates have gone up a lot. In 2010, a sample of SPAC IPOs on Euronext Amsterdam had a redemption rate of 54.2% and a mean of 59.9%. Investors in SPACs should keep an eye out for high redemption rates and deals to merge with other companies. If these companies can’t meet their redemption obligations, they may need to find other ways to pay for their business. This could make the PIPE market more competitive. Degree of redemption don’t always show how well a company did after the transaction, but they may show how much risk retail investors are willing to take.

High redemption rates hurt a SPAC because they can cut the cash proceeds from the merged company by a large amount. A high redemption rate also makes it more likely that a SPAC won’t have enough cash to meet the minimum cash condition.