Why are SPACs becoming popular in the United States?
Special Purpose Acquisition Companies (SPACs) are considered one of the most spectacular developments in the financial industry because they have disrupted the way organizations work and go public. They have been gaining popularity around the world, especially in the USA.
The massive popularity of SPACs can be judged by the fact that in 2020, $83 billion was invested in them, while this amount doubled to $160 billion in 2021.
If you are not familiar with the basic workings of a SPAC and why they have been gaining attention, keep reading to learn more.
What is a SPAC?
A SPAC is a business with the specific intention of carrying out an acquisition. However, this term has been expanded to also cover mergers. Although SPACs are listed and traded publicly, they do not own any functioning assets.
Instead, they raise money for their business, give themselves a deadline to locate a partner for an acquisition or merger, and then float the resulting private firm.
It’s also crucial to remember that SPACs are unable to foresee the firm they will purchase. The acquired business must also be worth at least 80% of the funds obtained by the SPAC IPO.
Working of SPACs
SPACs raise capital by selling shares and warrants in a bundle during an IPO, which typically costs $10. Typically, SPACs have 24 months to find a target purchase and complete it.
Investors in the SPAC have the option to sell their shares but maintain their warrants if they disagree with a planned acquisition. That affords them the chance to benefit if a merger goes better than they anticipated, even in mergers they choose to forego.
SPACs are thought to be a safe investment as a result of this combination, particularly during choppy markets. The acquisition target becomes a public corporation when the business combination is finalized.
Why did SPACs get popular?
The COVID-19 pandemic has increased volatility, making initial public offerings (IPOs) riskier. The U.S. Federal Reserve also added more money to the market at the same time.
Moreover, it reduced yields, which allowed SPACs to potentially provide superior returns with some downside protection due to the right of redemption.
The new focus also arrived at a time when venture capital and private equity firms, which had invested heavily in private companies for a decade, were searching for an exit, preferably one that did not involve an IPO.
5. Market Knowledge
Professional and experienced recruiters have comprehensive knowledge of the market and the latest trends. As a result, they are able to help organizations hire the best candidates. They frequently have insightful information and wise counsel to share with you.
Therefore, by hiring staff placement services, you get access to their knowledge about compensation rates as well as the skill sets that are essential for setting expectations for career growth, contract support, current hiring challenges, and even market trends in your industry that you would not otherwise be aware of.
Why are SPACs gaining popularity now?
Following are the top three reasons why SPACs are gaining popularity nowadays:
Supply and Demand
Over the past 20 to 30 years, the number of publicly traded companies has decreased significantly, from 8,000 to a little over 4,000 as of today, but capital has been pouring into the public markets at a faster rate.
The stock exchanges have worked to increase the number of SPACs on the market since that is how they generate money.
Private Equity Market
The amount of money invested in private equity has grown significantly (to over $2 trillion now), yet the quantity of exits has decreased. Private equity-backed portfolios support the SPAC model since they are constantly seeking ways to exit and earn a profit.
SEC Regulations
SPACs’ image in the investing community has improved as a result of the SEC’s increased involvement in their regulation. To the advantage of all parties, they have intervened to establish a fixed price for each IPO and to control voting and redemption rights.
Benefits of SPACs
SPACs have many different benefits that make them popular in the USA. These are:
- SPACs offer the chance for a better valuation because public corporations trade at higher multiples than private enterprises.
- Business owners do give up some control when bringing in private equity. However, SPACs allows you to keep a sizable ownership part in the company.
- SPACs provide security in terms of liquidity thanks to the money obtained in the IPO.
- While traditional IPOs can take up to 2-3 years to complete, SPACs are usually finished in just a few short months.
- SPACs often cover the majority of the expenditures, saving the company a sizable sum of money compared to regular IPOs, which are quite expensive to execute.
- SPAC agreements are identified in advance, and both parties accept the valuation. You can be assured that the transaction will take place and that it will be at a value you are comfortable with.
In a Nutshell
Overall, there is no doubt about the fact that SPACs continue to enjoy massive popularity around the world, including in the USA.
Experts, such as accounting firms in Singapore and in the USA, can also facilitate business in going public via SPAC. For companies that are looking to benefit from SPAC, it is recommended to engage the services of such experts for the best professional advice and outcomes.
