Like many red-hot investments, special purpose acquisition companies inspire a mixture of desire and disdain. But with a bit of a scrub, they could be a force for good in helping companies raise equity, shaking up an area of the market that for decades has been cornered by investment banks.
Appetite for SPACs has reached manic levels. In the past week, lifestyle guru Martha Stewart, adult entertainment group Playboy Enterprises and former Cosmopolitan editor Joanna Coles have all featured in vehicles that raise capital with the sole intention of finding and merging with another company. The target companies end up with a stock-market listing with relatively little fuss. SPACs listed in the United States raised $41.7 billion in the first nine months of this year, according to Refinitiv – more than the five previous years combined.
High financiers like Bill Ackman and Dan Loeb have all lent their names and Rolodexes to SPACs in recent months, but still a grubby feel persists. One problem is that there have been high-profile stumbles. Electric-truck maker Nikola, whose executive chairman quit and shares slid after a research firm accused it of fraud, came to the public markets through a SPAC. And the structures are generous to their managers, which creates a conflict. Backers typically receive shares in the new company for little or nothing.
There’s even an exchange-traded fund for punters who want to bet on SPACs without having to choose based on their individual merits. An ETF may be a helpful way of seeing these vehicles’ aggregate performance, but it also offers a new to ride the bandwagon. U.S. Securities & Exchange Commission boss Jay Clayton is now looking into compensation structures.
With a cooler head, SPACs can do some good by sparing companies the volatility of the traditional IPO. But first they need two things. One is a tweak to the lopsided fee structures. Some, like Ackman have tried to make it fairer by setting a higher trigger for their rewards, or taking a pared-down basket of goodies. The other is for bigger, more respectable names to start using them. Holiday rental app Airbnb is one giant private firm that has been wooed by SPACs but so far kept its distance. A target of that size and caliber would definitely spruce up the neighborhood.