‘SPAC’ may sound like a branch of a secret space exploration initiative, but it’s actually a pretty interesting type of business. These curious companies aren’t anything new but their increasing popularity is impacting global trade.
Here’s all you need to know about how SPACs work and why they might shake things up in the UK.
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What is a SPAC investment?
Those four letters stand for ‘special purpose acquisition company’. I’m sure you’ll agree that SPAC rolls off the tongue a little easier.
Essentially, a SPAC is a shell company with no commercial operations. So it doesn’t work like a normal business.
The sole purpose of a SPAC is to try to raise money through an IPO. It can then go out and buy a proper business. Because of this, SPACs sometimes go by the lavish nickname of ‘blank check companies’.
How does a SPAC work?
Investors can buy shares in SPACs on stock exchanges. This money then goes towards purchasing an existing company. Once the purchase becomes final, the SPAC merges with the company they have just bought to create one entity.
This might seem strange and long-winded, but it can help some businesses. Going public can be a complex and expensive process. Because SPACs are already publicly listed after their IPO, it means the business they buy and merge with gets a shortcut to going public.
The business also gets access to the experienced managers running the SPAC that has just bought it. So there are definitely upsides for companies who go through this process.
How are SPACs impacting global expansion?
The popularity and practicality of these organisations are having a knock-on effect internationally.
Nick Whitehead, senior manager at ZEDRA explains how these deals are changing the horizon of global expansion: “The driving factor in companies deciding to merge into a SPAC is, for the most part, access to funds.
“With this becoming an appealing, popular, and increasingly straightforward option, it might be that we see companies willing to forgo geographical convenience and relocate to somewhere new that works for them.
“SPACs are mostly used in the US, where they became increasingly popular during 2020, and we are seeing UK entities exploring this transatlantic opportunity as a viable option for their fundraising and expansion.”
Will we see more SPACs in the UK?
Although the US is the current hot spot for acquisition companies, things could be changing.
The UK is attempting to reinvent itself as a global financial hub. One potential way to drive innovation is by using exciting ways to make the UK more attractive for companies.
Nick Whitehead explains how the situation might develop on these shores: “We are seeing the UK reacting accordingly with the news that Chancellor Sunak will be commissioning a review of UK stock market rules and regulations in a bid to enable high-growth tech companies and produce SPACs with better acquisition opportunities.
“Without a doubt, SPACs will soon become a more frequent transaction seen in the UK markets too.
“With London very much open for business, a long history of success for tech and fintech companies and now, another technique available to access funds and promote growth – we’re set to enter a new phase in global expansion, with SPACs leading the charge.”
Are they a good investment?
Although there are a number of upsides for the businesses being bought, the situation for individual investors is different.
The main question mark around these investments is that they’re a bit of a lucky dip. There could be great returns, but there could also be some unique risks and challenges:
- When investing, you won’t know what company will be bought
- You will basically be investing in the people who run the SPAC and putting faith in them to make a good deal
- Sometimes, it can take a long time for the SPAC to buy a company
Due to the mystery, it can be hard to properly research these investments. You have to really know what you are doing.
How do I invest in a SPAC?
If investing this way is right for you, then you can buy shares in a SPAC using a share dealing account.
You just need to make sure that your platform gives you access to international shares as the bulk of these investments are on American exchanges.
Like any investment, it’s important to do your homework and really understand what it is you’re putting your money into before diving in.