DeSPAC index

Further to our piece on private equity funds from last week, we’ve been looking at other vehicles that invest in similar types of assets.

Special purpose acquisition corporations (or SPACs) have become enormously popular in the US over the last two years. Basically these are companies that list on the stock exchange as a shell with no actual business. The sponsors of the SPAC raise capital from the public, list the corporation on the exchange, and then go and find a business to buy with all that cash. This conversion of a SPAC into a real business is called a “de-SPAC” transaction. In 2021 there were over 700 SPACs listed, raising around $200B.

Source: Pitchbook

On the face of it this sounds like an absurd investment proposition. Why would investors put money into a company with no business? Surely it would be better to invest in the IPOs of actual businesses. There is actually some merit to the idea: the regulatory hurdles for listing a SPAC are low, and it can be easier and faster to launch a SPAC and then de-SPAC it than to IPO a business normally. But its hard to see how some regulatory convenience makes up for the absence of a business model from the investor’s point of view.

And the performance of SPACs after de-SPAC transactions (the dark blue line below), shows that it has not been a winning proposition for investors.

Source: Pitchbook

SPACs are not readily available to investors in our market, and even if they were we’d strongly suggest that they should stay away from them. IPOs are challenging enough to value when there is a business attached, and an IPO without a business is not an investable asset at all in our view.

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This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

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