Is SPAC A Good Investment?
Special Purpose Acquisition Companies (SPACs) are publicly-listed companies that buy a private company to make it public via acquisition. They have given companies a way to go public that is different from the traditional IPO process.
After the sudden boom of SPACs in 2020 and 2021, there has been a decline in their popularity and success. Therefore, a lot of people are wondering whether it is still worthwhile to invest in a SPAC.
In this article, we will explore various aspects of SPACs and determine whether they are still a good investment.
What Are SPACs?
SPACs are non-operating public companies. Their only goal is to find a private company and buy it so that the company they buy can go public. SPACs are also called “blank check” companies.
Whenever a private company is acquired by a SPAC, it is called a reverse merger. A traditional merger involves a private company taking over a public company.
Importance of SPACs
Taking a company public is a complicated procedure. When you engage a professional pre-IPO advisory services of an audit firm in Singapore, you will discover that going public requires a complete evaluation of the organization, which often takes a long time.
However, if a private company wants to go public quickly, it can be acquired by SPACs. So, SPACs are known for making the initial public offering (IPO) process much more flexible and easy.
Taking a company public is also complicated because the financial market can behave unpredictably in a traditional IPO.
On the other hand, a SPAC is already a public entity, so a certain time period is present for the reverse merger to take place and allow a private company to become public.
SPACs also allow the founders of private companies, as well as other major shareholders in a business, to sell a higher percentage of the ownership in a reverse merger. This is not possible in IPOs due to strict policies and scrutiny by the authorities.
There are many other benefits of SPACs that private companies can get during the process of going public. A professional audit firm in Singapore that is experienced with these procedures can help the company in getting through the process easily and quickly.
Investing in SPACs
Generally, when it comes to investing in SPACs, there are two options: invest in a SPAC ETF or invest in individual securities.
By choosing individual SPACs, the investors get the option of focusing on the profitable opportunities that seem promising in the future. However, it can also have some disadvantages and risks due to the overall structure of the SPAC.
A huge benefit of investing in SPACs is that the investment is made in government bonds until the completion of the merger. Therefore, a shareholder can choose to exit the SPAC via liquidation or by selling the shares in a secondary market.
Overall, the price is locked in, and SPACs are unlikely to decrease below the IPO price until the merger is completed and closed. The IPO price is typically determined during the pre-IPO advisory stage with the help of audit firms in Singapore.
Investors participating in the SPAC IPO will get a warrant and common stock. It is common for hedge funds to sell the SPAC after the IPO but keep the warrant because its value can increase when the SPAC stock rises above the strike price.
Many experts believe that investing in SPACs is worth it, especially when it is done right. One of the most profitable ways to invest in SPAC is by purchasing it shortly after the IPO and selling it one week after the announcement date of the merger. This kind of investment strategy can generate a significant return of up to 7.5%.
Some of the other important factors to keep in mind while investing in SPACs are:
- Be familiar with the timeline of SPACs. Most SPACs have a period of two years to go from IPO to closing the merger. If the merger is not taking place in this period, SPAC has a high chance of being liquidated.
- Rely on the experts, such as audit firms in Singapore, to ensure you are investing in reliable SPACs.
- Diversity your portfolio to minimize the risk of loss.
In a Nutshell
Despite the small decline in popularity of SPACs, they are still a good investment, especially when you follow the advice of the professionals. Check with audit firms in Singapore to learn the details.
All in all, SPACs are highly beneficial for private companies to go public through an alternate route instead of the traditional IPO procedures, and investors can also make a significant amount of money by investing in SPACs.