SINCE YOU ASK: Here we explain baffling stock market terminology and how you might stand to profit – this week it’s Spacs
What does Spac stand for?
A Spac is a special purpose acquisition vehicle, an ’empty shell’ company floated on a stock exchange.
The money raised is used to purchase another firm, usually a private one that is not listed. The idea is to bring that business to the stock market faster and less expensively than by taking the normal route.
If an acquisition cannot be found within two years, the cash has to be returned to the original shareholders. That can cause a stampede to find something to buy, whether it is suitable or not. It turned into a Wall Street craze. Such was the popularity of Spacs in 2021 that 334 deals were done with a value of $597billion – 10 per cent of mergers and acquisitions worldwide.
Change of mood: A Spac is a special purpose acquisition vehicle, an ’empty shell’ company floated on a stock exchange
Why the excitement?
At the height of the Wall Street Spac feeding frenzy in late 2020 and early 2021, the profits were often handsome.
The cult of personality played a role. Sir Richard Branson, Jay-Z and Donald Trump are among the figures associated with Spacs. When Trump announced he was launching a media company to merge with a Spac, Digital World Acquisition, its share price soared. This get-together is yet to happen, however.
What’s the mood now?
Excitement has abated as a result of disappointing performance. The price of the De-Spac ETF (exchange traded fund) is down around 41 per cent over the past 12 months. There are anxieties over the quality of some of the companies acquired.
Usha Rodrigues, a professor of corporate finance at Georgia university, likens some of the mergers to hasty Las Vegas weddings.
Who makes money?
Hedge fund investors, who may borrow to invest in Spacs before they are listed, will make a killing if there is a price ‘pop’ (a sharp rise) at the start of trading. The banks that advise Spacs can also earn lucrative fees at various stages.
Private investors, by contrast, are only permitted to buy the shares after they start trading – sometimes at an inflated price.
But many will still be tempted to take the risk if a celebrity is involved, which is ‘never a good idea’, according to the SEC, the US watchdog.
Are Spacs coming to the UK?
Amsterdam has become Europe’s Spac capital, with listings including one sponsored by Bernard Arnault, boss of luxury goods giant LVMh. Branson is expected to list another Spac in Amsterdam this year.
The UK would like to grab a slice of the action to affirm the City’s status as a financial centre. Rishi Sunak is said to be pro-Spac. Some listing rules have been relaxed, such as those on reverse takeovers (where a smaller company snaps up a larger business). To date, London can boast only one Spac, although more could arrive in spring.