The hottest thing in finance has four letters. Former NBA star Shaquille O’Neal has one. The same is true of former Mayor Paul Ryan. The same goes for silver-haired hedge fund billionaire William Ackman.
It is called SPAC and, increasingly, it is the preferred source of financing for private companies seeking to go public. Richard Branson’s space exploration company, Virgin Galactic Holdings Inc., went public through a SPAC in 2019, and sports betting company DraftKings Inc. did so last year. Almost 300 SPACs are now looking for business, armed with about $ 90 billion in cash. And more are being launched at a furious pace – so far this year, an average of five new SPACs launched each business day.
“If you don’t have your own SPAC, you are nobody,” said Peter Atwater, founder of the research firm Financial Insyghts.
SPACs – meaning special purpose procurement companies – are essentially large pools of money listed on an exchange. The goal is to find a private company, buy it and open it quickly. Some on Wall Street call them “blank check companies” because investors who support SPAC put their money months before an acquisition target is identified, relying on the people who run the show to find a good deal.
These businesses are generating a lot of interest because they generate big paydays for their creators, make it easier for startups in hot industries, like electric vehicles, to capitalize on a frothy race in the stock market and offer investors every day a new path to a hot stock. When an SPAC buys a company, it merges with it in a kind of accelerated IPO process – a so-called “reverse merger” – while bypassing the normal scrutiny that an IPO receives.