There is a curious convergence between financial markets and the fashion industry. Like seasonal clothing collections, trends in finance come and go and every now again old styles come back in vogue, with modern twists. In the U.S., the flavor of the month in 2020 was the so-called special purpose acquisition companies, or SPACs. And this season, they are all the rage once more, with added Latin American flair.
SPACs are publicly-listed companies created with the sole purpose of acquiring other firms and bringing them into the market. Thus, they are often known as “blank check companies.” SPACs begin life with a group of investors — or “sponsors” — who set up a shell company without assets, products, or services. This empty firm is then taken public, after which the SPAC has 24 months to acquire a target company using the proceeds of its stock offering. If all goes well, this target business also becomes publicly traded.
The SPAC model has become increasingly popular for companies looking to go public. Data from S&P shows that SPACs raised USD 88 billion in the first quarter of 2021, obliterating the USD 76 billion record for the entirety of 2020. Financial data company FactSet points out that SPACs were responsible for half of all IPOs in the U.S. last year, joining the list of heavyweights Nikola, DraftKings, and Virgin Galactic.
Indeed, going public by way of merging with a SPAC is a much simpler and quicker process launching a regular IPO. Furthermore, as the funds are already available, the entire process is more stable — the success of IPOs, meanwhile, are heavily subject to market conditions.
At the end of the day, however, SPACs are only...
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