This content is free thanks to our sponsors
Sponsored Ad – I may earn a commission if you click and buy
Investment
SPAC Investing
Investing in a Special Purpose Acquisition Company — a listed shell company that raises money with the sole purpose of merging with a private company to take it public.
The SPAC process: a sponsor (experienced investor or deal-maker) raises money via an IPO of the SPAC at $10 per share. The money sits in a trust earning interest while the sponsor searches for a merger target — typically a private company that wants to go public without the traditional IPO process. If a deal is found and approved by shareholders, the SPAC merges with the target company. If no deal is found within the deadline (usually 24 months), investors get their $10 back.
The structural advantages for investors: downside protection (worst case you get $10 back if no deal happens) and the optionality of a potentially great deal. The disadvantages: sponsors typically receive 20% of shares for free (called the "promote"), which immediately dilutes other investors once the merger happens. And the deals are often done at premium valuations because the sponsor is motivated to do a deal before the deadline, not necessarily the best deal. Post-2021, SPAC scepticism is now the default position of most institutional investors.