SPACs are all over the headlines, but they’re not as new as you may expect. SPACs have been around for years but have recently gained popularity as a method of going public and raising capital. 

While the headlines have focused on the wildfire growth in the number of SPACs, the amount of funding behind them, and which celebrities have invested in them, Bridgepoint believes it is important for company owners to understand how they work and how your company may be able to leverage SPACs for growth and liquidity.

Below, we explain what SPACs are, how they work, and how that impacts family- and founder-owned companies in the middle market.

Watch our short video for highlights from Bridgepoint Founder and CEO Matt Plooster, then read on below.

What is a SPAC?

A SPAC, or “special purpose acquisition company,” is a non-operating, publicly listed company whose purpose is to identify and acquire a private company, which allows the acquisition target to have publicly listed stock. Also referred to as “blank check companies,” SPACs are a vehicle for raising money to purchase a company, which takes that company public during the process of being acquired.

SPACs may attract a diverse pool of investors ranging from well-known private equity funds to the general public. 

SPACs are generally formed to pursue companies within certain industries or sectors, though they may have a more general interest in companies that span many sectors.

How do SPACs work?

SPACs combine investors’ capital with founders’ capital into a bundled unit of stocks and warrants, which represent shares of an entity that goes public via an IPO. The purpose of this entity is to find a private company to acquire within two years.

If a suitable company is not found within that time frame, the money is returned to shareholders. If a suitable acquisition is found, the SPAC performs due diligence, arranges terms, and announces the deal to the public.

The proposed acquisition must then pass a vote by the SPAC’s shareholders. Upon doing so, the additional debt and equity funding necessary to complete the acquisition must be arranged, as SPACs typically target companies valued at two to four times the amount raised in the SPAC’s IPO. At the end of the process, the acquired firm becomes publicly listed on the stock exchange. 

Why do SPACs matter to business owners of private companies? 

1. 1. SPACs offer another option for liquidity. SPACs offer another liquidity option for private companies that are on the larger end of the middle market. Going public via a SPAC provides access to capital for aggressive growth plans, and founders can get more liquidity from the “reverse merger” process of a SPAC than they may receive through an IPO. It can also be a more flexible, less burdensome, and oftentimes faster way to take a private company public. Because the company must only pitch to the acquiring SPAC, the company can avoid the complex and lengthy process of carrying out an “IPO roadshow” to drum up interest, as they would in a traditional IPO. Private company owners can also receive earn-outs, or newly issued shares in the combined entity, allowing owners to avoid the mandatory lock-up period for selling newly public shares that occurs during an IPO.
      
      This method of going public also tends to offer a more predictable value to the business owner. Merging with a SPAC reduces the risk posed to the IPO’s value by the sentiment of the broader market. Unlike an IPO, negotiations happen privately at a set price, making the deal more immune to market volatility and public sentiment.
   2. SPACs increase competitive tension. The abundance and popularity of SPACs, all working to find a suitable acquisition target within a strict deadline, add another layer of competitive tension to a process seeking the outcomes of liquidity and access to capital.
      
      SPACs generally have a period of about two years to find an acquisition target. The presence of this “due date” for SPACs to find an acquisition target may influence valuations in a favorable manner. The closer the SPAC is to its deadline, the more motivated it may be to make a deal to avoid having to return its money to shareholders.
   3. SPACs can offer strategic value. SPACs are led by a “management team,” also known as the SPAC’s “sponsors.” These sponsors may offer industry expertise and connections that complement the management team of the acquired company, particularly when the SPAC was formed with specific industries or sectors in mind.

How can business owners take advantage of the rise in SPACs?

For private companies on the larger end of the middle market, SPACs may be another option that can be leveraged for growth capital or liquidity. Merging with a SPAC is just one option for capital in a vast array of creative solutions available to company owners that work with Bridgepoint Investment Banking’s team of capital raising and M&A experts. No matter your goals, engaging an unconflicted team of experts is essential to making sure you receive the right advice for your unique company.

Contact Bridgepoint today to discuss your goals and options for liquidity, access to capital and more.

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