Special Purpose Acquisition Corporation – SPAC

October 2020 has 290 SPACs with $86.5 billion in cash that have either filed for IPOs, are searching for targets, or have announced proposed mergers. I put on my investment banker hat and describe how a Special Purpose Acquisition Corporation can be set up. I then put on my investor hat and describe by modelling a hypothetical deal how sponsors and IPO pre-merger investors stand to make money and post-merger investors loose.

Takeaways: (i) SPAC is not a  poor man’s private equity, much as Alternative Mutual Fund is not a poor man’s hedge fund; (ii)SPAC structure results in severe dilution of the value of SPAC shares : post-merger share prices fall and price drops are highly correlated with dilution or cash shortfall ; (iii) SPAC investors bear structural cost of the dilution band pay for companies they bring public; (iv) SPAC creates substantial costs, misaligned incentives, and losses for investors who own shares at the time of SPAC mergers: SPAC shares tend to drop by one third of their value or more within a year following a merger (iv) Only those who buy shares in SPAC IPOs and either sell or redeem their shares prior to the merger do very well ( typically 10-13% historical annual return): IPO investors who are pre-merger shareholders should exit at the time of the merger, either by redeeming their shares or selling them on the market; (v) Investors that buy later and hold shares through SPAC mergers bear the costs of the generous deal given to IPO-stage investors (vi) Sponsor’s promote, underwriting fees, and dilution of post-merger shares caused by SPAC warrants and rights transfer value from SPAC investors to pre-merger investors; (vii)Sponsor has an incentive to enter into a losing deal for SPAC investors if its alternative is to liquidate.

Author: Sameer_Jain

Partner. Sameer Jain is founder of FinTech ActiveAllocator.com, the world’s first portal that seamlessly integrates traditional, illiquid and alternative investments within portfolios. Prior to this he was Chief Economist & Managing Director at AR Capital. Before that he headed Investment Content & Strategy at UBS Alternative Investments. At UBS, he served as a non-voting member of the Wealth Management Research investment committee, and as a capital allocator was responsible for all illiquid investing including fund manager selection and due diligence across the platform. Prior to UBS he headed product development & investment research at Citigroup Alternative Investments that managed over $75 billion of alternative investments across hedge funds, managed futures, private equity, credit structures, infrastructure and real estate. Here he led a team that developed proprietary models for portfolio strategy and asset allocation with alternative investments, provided investment support and research to pension plans, sovereign wealth funds, endowments as well as internal clients including Citi Private Bank. Before this he was with Cambridge Alternative Investments and SunGard (System Access) where he travelled to over 80 countries for work across Europe, Asia, Middle-East and Africa. He has written over 30 academic and practitioner articles on alternative investments with thousands of downloads at SSRN, presented at over a hundred industry conferences and has coauthored a book, Active Equity Management. Mr. Jain has multiple degrees in engineering, management, public administration and policy and is a graduate of Massachusetts Institute of Technology and Harvard University. He is a recipient of the Alfred Sloan Fellowship and subsequently was a Fellow of Public Policy and Management at the Harvard Kennedy School of Government for a year. He holds Series 7 and 66 securities licenses.

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