What is a SPAC?
A liquid equity investment instrument with a defensive risk profile, stable market-uncorrelated performance, upside potential.
Special Purpose Acquisition Companies: financial vehicles allowing a team of managers with outstanding track record (the ‘Sponsor’) to collect capital through an IPO, for the purpose of a single acquisition. (‘Business Combination’)
SPAC IPOs are typically listed at usd 10, including a free warrant. Capital collected is 100% invested in short term US Government treasuries held in escrow with a bulge bracket bank, segregated and untouchable except for the purposes of acquisition or Spac dissolution. All costs (3-4% of capital collected) are borne by sponsors and not shared with investors. Management team invests at-risk capital upfront to cover IPO fees: investors can thus be returned at least 100% of capital (some SPACs return an additional guaranteed yield).
What is the Scope of SPAC?
Management has 18-24 months time to conclude the business combination (80% initial capital required) or return at least 100% of capital if no acquisition is successfully concluded; over that period of time, the SPAC remains a listed and liquidable equity position with guaranteed capital recovery; following business combination, the acquired company takes over the listing and assumes a regular equity investment risk profile.Every investor retains the option not to participate in the business combination and recover at least 100% of capital.
The Business Combination
The SPAC will explore possible takeover targets up to 4-5 times size of IPO. SPACs are free to roam any sector/geography in the quest for a target: sometimes a preference is highlighted in prospectus, but is never limiting. In case of business combination, the sponsor is entitled to a (usually 20%) shareholding in the acquired company; in case of SPAC liquidation, the sponsor’s investment is not compensated. sponsor teams have a strong personal incentive to perform and alignment of interest with investors is ensured. At business combination, investors retain the right to opt out of the acquisition and redeem common stock at usd 10/share (retaining tradeable warrants).
Sample Offering Structure
- Issuer: The Sponsor–management team or Private Equity company
- Exchange: NASDAQ
- Offering: usd 350 mln on average; sizes range usd 50-600 mln
- Securities: 35 mln units - 1 common stock and 1 warrant. Separate trading after max 52 days (usually within 2-3 weeks)
- Unit Price: usd 10.00. 100% held in trust – t-bills in escrow with major bank.
- Warrent Terms: Exercisable on later of 30 days post business combination or 12 months after IPO @ usd 11.50, for 5 years. Usually, 2 warrants entitle to 1 share when exercised.
- Sponcer Investment: 3-4% of capital collected, invested in warrants at usd 1/warrant.
- Entilies to 'Promote': 20% management share at Business Combination, subject to lockup.
- Use of Proceeeds: Acquisition of an unlisted operating company.
Why invest in SPAC
Versatile portfolio play - offering downside protection (100% of IPO funds in escrow in T-bills) and upside potential (deriving from the eventual business combination), plus derivative optionality through the free warrant. Effective at stabilising portfolios as – until the business combination – SPACs have a defensive risk profile and are uncorrelated from stock market performance. Nasdaq-listed SPACs have proven to be highly liquid, due to cash in escrow underlying the common, with both institutional investors (eg. SPAC-only funds) and market makers acting as block trade counterparties. The free warrant at IPO offers certain return when traded in market.
Alignment Of Interests
- INVESTOR: Free-risk investment with at least 100% redemption and potential upside, plus optionality. Participation in IPO vs secondary market guarantees fixed price, free warrant and no commission.
- SPONSOR: Immediate seizing of acquisition opportunity, cash in hand. Repeat SPAC sponsor teams profit from pipeline, thus shortening lead time to business combination.
- TARGET: Easier and faster route to market listing vs traditional IPO or Private Equity takeover. Maximum capital structure flexibility.
Receive unit: common @ usd 10 + free warrant, No commission, Free trading from day one.
- SECONDARY MARKET:
Trade unit, common, warrant. Market commissions and prices apply. Common price is stable. Warrant statistically grants return.
- BUSINESS COMBINATION:
Sell unit/common on market. Redeem common @ usd 10. Stay in Newco by holding unit, holding common or exercising warrant.
Versatile Investment Strategies
Bulge bracket banks such as Citi, Credit Suisse, Morgan Stanley, JP Morgan, Deutsche Bank, Merrill Lynch, UBS, are repeat SPAC issuers Leading financial institutions including pension funds, hedge funds and wealth managers are recurrent investors in SPACs, also through dedicated funds, thus ensuring market liquidity and recognition
|Unit||Ticker||ISIN||IPO Date||Maturity||Price||% CHG||Capital Collected:||Book Runners|
|IPO||LAST||on IPO||USD MLN||With I-BANKERS|
|DOUBLE EAGLE||EAGLU||KYG281951247||09/15||09/17||10.00||10.55||5.5%||500||DEUTSCHE BANK, MERILL LYNCH|
In the current low yield - high volatility market environment, SPACs provide a unique investment opportunity: risk is not evenly distributed across investors but very clearly concentrated on the SPAC Sponsor team. Cash alternative investment with 2-year maximum maturity, liquid trading, statistically certain return way above free risk and upside potential at announcement. Worst case scenario: capital return guarantee and 0% return – uncomparably more attractive to both equity and bond investment. IPO offers low entry price to acquisition, ample equity story analysis time and market reaction assessment.
Where We Add Value
A boutique investment bank founded in 1996, "Preferred Nasdaq IPO partner" to bulge bracket banks. Sole Wall Street SPAC underwriter focused on servicing European and US boutique investors: asset managers, family offices and dynamic private wealth managers and active on the SPAC market since 2004, on the cover of ≈20% of SPACs issued worldwide.