What is Special Purpose Acquisition Company?

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A special purpose acquisition company (SPAC) is a company without commercial operations and is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring or merging with an existing company.Also known as blank check companies, SPACs have existed for decades, but their popularity has soared in recent years. In 2020, 247 SPACs were created with $80 billion invested, and in 2021, there were a record 613 SPAC IPOs. By comparison, only 59 SPACs came to market in 2019.

Definition

A Special Purpose Acquisition Company (SPAC) is a company with no commercial operations, formed solely to raise capital through an Initial Public Offering (IPO) for the purpose of acquiring or merging with an existing company. Due to its lack of specific business plans, a SPAC is also known as a 'blank check company'.

Origin

The concept of SPACs has been around for decades, but they have gained significant popularity in recent years. The year 2020 was pivotal for SPACs, with 247 SPACs formed, raising $80 billion in investments; 2021 set a record with 613 SPAC IPOs. In contrast, there were only 59 SPACs in the market in 2019.

Categories and Features

SPACs are generally categorized into two types: those initiated by experienced management teams and those launched by celebrities or well-known investors. The former typically has a higher success rate due to the management team's extensive industry experience and broad business networks. Key features of SPACs include a fast-track listing process, lower regulatory requirements, and the potential for high returns for investors. However, they also carry risks such as target company uncertainty and potential investment losses.

Case Studies

A notable SPAC example is DraftKings in 2020. DraftKings, an online sports betting company, went public through a merger with Diamond Eagle Acquisition Corp. Another example is Virgin Galactic, which became the first publicly traded commercial space travel company through a merger with Social Capital Hedosophia. These cases illustrate how SPACs can facilitate a company's rapid entry into the public market.

Common Issues

Investors may face issues such as poor target company selection leading to investment losses, the risk of merger failure, and uncertainties due to market volatility when participating in SPAC investments. Investors should thoroughly research the SPAC's management team and potential target companies to mitigate risks.

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A liquidity trap is an adverse economic situation that can occur when consumers and investors hoard cash rather than spending or investing it even when interest rates are low, stymying efforts by economic policymakers to stimulate economic growth.The term was first used by economist John Maynard Keynes, who defined a liquidity trap as a condition that can occur when interest rates fall so low that most people prefer to let cash sit rather than put money into bonds and other debt instruments. The effect, Keynes said, is to leave monetary policymakers powerless to stimulate growth by increasing the money supply or lowering the interest rate further.A liquidity trap may develop when consumers and investors keep their cash in checking and savings accounts because they believe interest rates will soon rise. That would make bond prices fall, and make them a less attractive option.Since Keynes' day, the term has been used more broadly to describe a condition of slow economic growth caused by widespread cash hoarding due to concern about a negative event that may be coming.

Liquidity Trap

A liquidity trap is an adverse economic situation that can occur when consumers and investors hoard cash rather than spending or investing it even when interest rates are low, stymying efforts by economic policymakers to stimulate economic growth.The term was first used by economist John Maynard Keynes, who defined a liquidity trap as a condition that can occur when interest rates fall so low that most people prefer to let cash sit rather than put money into bonds and other debt instruments. The effect, Keynes said, is to leave monetary policymakers powerless to stimulate growth by increasing the money supply or lowering the interest rate further.A liquidity trap may develop when consumers and investors keep their cash in checking and savings accounts because they believe interest rates will soon rise. That would make bond prices fall, and make them a less attractive option.Since Keynes' day, the term has been used more broadly to describe a condition of slow economic growth caused by widespread cash hoarding due to concern about a negative event that may be coming.

Liquidity Crisis

A liquidity crisis is a financial situation characterized by a lack of cash or easily-convertible-to-cash assets on hand across many businesses or financial institutions simultaneously.In a liquidity crisis, liquidity problems at individual institutions lead to an acute increase in demand and decrease in supply of liquidity, and the resulting lack of available liquidity can lead to widespread defaults and even bankruptcies.

Liquidity Crisis

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Liquidity Event

A liquidity event is an acquisition, merger, initial public offering (IPO), or other action that allows founders and early investors in a company to cash out some or all of their ownership shares.A liquidity event is considered an exit strategy for an illiquid investment or equity with little or no market to trade on. Founders of a firm push toward a liquidity event, and investors like venture capital (VC) firms, angel investors, or private equity firms expect one within a reasonable amount of time after initially investing capital.

Liquid Alternatives

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Liquid Alternatives

Liquid alternative investments (or liquid alts) are mutual funds or exchange-traded funds (ETFs) that aim to provide investors with diversification and downside protection through exposure to alternative investment strategies. These products' selling point is that they are liquid, meaning that they can be bought and sold daily, unlike traditional alternatives which offer monthly or quarterly liquidity. They come with lower minimum investments than the typical hedge fund, and investors don't have to pass net-worth or income requirements to invest. Critics argue that the liquidity of so-called liquid alts will not hold up in more trying market conditions; most of the capital invested in liquid alts has entered the market during the post-financial crisis bull market. Critics also contend that the fees for liquid alternatives are too high. For proponents, though, liquid alts are a valuable innovation because they make the strategies employed by hedge funds accessible to retail investors.

Zero-Coupon Convertible

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Zero-Coupon Convertible

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Zero-Investment Portfolio

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Zero-Investment Portfolio

A zero-investment portfolio is a collection of investments that has a net value of zero when the portfolio is assembled, and therefore requires an investor to take no equity stake in the portfolio. For instance, an investor may short sell $1,000 worth of stocks in one set of companies, and use the proceeds to purchase $1,000 in stock in another set of companies.