SPACs grew 4x in 2020: What do they do, and are they coming to the ASX?
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SPACs (special purpose acquisition companies) don’t exist on the ASX yet.
But if you’re an active stock investor, there’s a good chance they’ve popped up on your radar.
Developed in the US, the model has been around for a long time. And in the post-Covid bull market, 2020 proved to be the year of the SPAC (among other things).
In view of that, we asked the ASX whether the SPAC frenzy will reach Australian shores. The answer? Probably not (but more on that later).
248 SPACs were launched on the US market last year, around four times as many as 2019.
Those 248 companies comprised just over half of the 480 stocks (an all-time record) that listed publicly in 2020.
SPACs list via IPO, but with a twist; the company itself doesn’t have any operations.
It’s a shell business, listed for the express purpose of merging with a private company. Once listed, the SPAC has two years to find and complete a deal.
In his recent bear-case for 2021 markets, famous investor Jeremy Grantham said the SPAC boom is reflective of the frothy speculation which has engulfed markets in the post-Covid rally.
Certainly, the generic version of the model can result in eye-watering returns for early SPAC investors.
It typically involves a ‘sponsor’, who acquires a 20 per cent stake in the SPAC for a nominal purchase price of $US25,000. This early SPAC stake is known on Wall Street as the ‘promote’.
The so-called promoter then usually invests another few million for the option to acquire warrants in the event of a successful merger.
An example of how it plays out, from US investment bank Jefferies:
“In a $US250 million SPAC, the sponsor typically receives approximately $60 million of common stock for a $7 million investment in warrants.”
Well-known investors such as Bill Ackman have launched SPACs of their own without quite such favourable ‘promote’ terms.
Proponents of SPACs say they facilitate the democratisation of the IPO model, by giving investors early access to large private companies via a publicly-listed structure with plenty of liquidity.
For example, when online rental marketplace Airbnb finally listed publicly last year it issued shares at $US68 a pop, with an implied market valuation of $US47 billion.
The stock promptly doubled on debut and is currently trading around $US125, leaving retail investors out of the post-IPO rally.
Given the prolific growth of US SPACs in 2020, we asked the ASX about the levels of SPAC activity in the Australian market.
After all, the local index had something of an IPO boom itself last year, with 66 companies joining the boards (up from 61 in 2019).
However, ASX spokesperson David Park told Stockhead there hasn’t been much SPAC-related interest among Aussie investors.
A few investment banks and fund managers (and one law firm) have expressed interest.
However, “there have not been any approaches from anyone looking to list a SPAC on ASX”, Park said.
Not only that, but even if they wanted to, they couldn’t — at least not yet.
“At present, the ASX listing rules do not currently permit the listing of these vehicles, so a policy review would be required to accommodate them,” Park said.
In addition, “any policy review would take into account the significant differences between the Australian and US IPO processes and the likely demand for SPACs among Australian sponsors and investors.”
For now, SPAC aficionados will have to stay focused on the 248 acquisition-companies that joined US markets last year.