SPACs have gotten spanked lately, with the Securities and Exchange Commission (SEC) warning about them and the once-energetic crowd of new ones shrinking.
But the slowing of the craze over special purpose acquisition companies (SPACs) is a good thing because it allows investors to better evaluate them, culling out the best, according to a panel on the subject at CIO’s 2021 Symposium on Wednesday.
“SPACs are here to stay, although at a lower volume,” said Ronald Temple, co-head of multi-asset and head of US equity at Lazard Asset Management, who termed the reduction in SPAC issuance a “healthy” development.
SPACs are shell companies that come to life via initial public offerings (IPOs). With the IPO capital in hand, they go on to buy out a functioning business over the next two years. Also known as blank check companies, these vehicles offer quicker paths to go public. The SEC last month admonished investors that SPACs shouldn’t be making such optimistic projections, which the agency said could be misleading.
While the SEC and other SPAC critics have highlighted the organizations’ flaws, the panelists pointed out that investors stand a decent chance of making good money on them going forward. Jonathan Glidden, CIO at Delta Air Lines, which has invested in them, noted that SPAC investors have a voice on what acquisition target is chosen, with the ability to vote yes or no.
If a SPAC can’t find a suitable target, then investors get their money back, since it’s in a trust and can’t be touched, Glidden said.
The Delta investment chief described a strategy on how investors can cash out of their SPAC positions after the IPO. People who participate in a SPAC at IPO, usually for $10 per share, also receive a fraction of a warrant for each share owned. As warrants are tradeable, an investor could unload the warrant, usually for 50 cents to $1 each while holding on to the equity. The investor can then sell the equity if there is a price pop once a deal is announced, or cash out and get the $10 back once the deal is approved. Glidden uses the strategy as part of a portable alpha program, but also described such moves as “synthetic fixed income.”
Furthermore, Temple said, SPACs have the virtue of price certainty: They go public at $10 per share. Conventional IPO pricing can waiver wildly pre-offering. Plus, the capital raised in the IPO, along with side financing known as a PIPE, or a private investment in public equity, can pay down the acquired business’ debt, he noted.
“The air’s now out of the balloon,” the Lazard executive said. “What that means is that better companies will go public.”
One steady source of SPAC and IPO targets, of course, is venture capital (VC). Panelist Jason Klein, CIO of Memorial Sloan Kettering Cancer Center, detailed how exacting VC operators are in vetting possible recipients of their money. They make sure that the leadership of startups really knows their stuff, Klein said, “and just aren’t borrowing ideas they heard at cocktail parties.”
Late-stage VC funding, when a fledgling company is well on its way, benefits from “the enthusiasm of investors who want disruption,” he said. Such innovative new companies tend to be in tech or health care, which makes for an imbalance, he observed.
SPACs have been around for decades, yet only recently came to the fore. Especially prior to the recent surge, they “are different from what they were 20 years ago,” said the panel’s moderator, Tim Recker of the James Irvine Foundation.
Register now to watch the symposium’s in-depth conversation on replay.