Financial markets see reemergence of SPACs

Special Purpose Acquisition Companies, once popular in the early 1990s only to fade away, have seen a recent reemergence in the financial markets. SPACs permit the investing public the opportunity to act like a private equity manager and speculate in securities often reserved for institutional investors and private equity firms. Formed during an Initial Public Offering, a SPAC essentially consists of a blank check, written by investors to a management team. That management team then spends the next 18 to 24 months searching for a merger candidate that they feel would create an accretive transaction that would benefit investors. SPAC IPOs are typically a package deal with IPO investors getting a unit consisting of one common share and one warrant. The warrant gives the investor the right, but not the obligation, to purchase additional shares of common stock at a specific price at some point in the future. During a SPAC IPO, the majority of the cash received from investors is placed in an interest-bearing trust account (less initial underwriting and operating expenses). The money will be held in trust until a business combination is approved by shareholders. After the IPO, the units trade on an organized stock exchange; providing liquidity for investors of the IPO should they wish to sell their units. After a short period of time, the units split and both the common and warrants trade individually on the stock exchange. Similar to closed-end funds, a SPAC can trade at a discount or premium to their cash trust value. SPACs currently trade on a variety of exchanges, from the OTC Bulletin Board to the American Stock Exchange and NASDAQ. SPACs offer both advantages and disadvantages to investors. The first advantage to investing in a SPAC is the ability to participate in a private equity-like transaction. Much like private equity firms, SPAC investors are able to speculate that savvy managers can successfully take private companies public. Additionally, by issuing and trading both common stock and warrants, individual investors are able to tailor the risk/return profile of the investment. SPAC investors also hold considerable power with the voting privileges attached to the common shares. If an investor does not like an acquisition proposed by management, the investor has the ability to vote against the transaction and then claim their pro-rata portion of the cash held in the investment trust. Additionally, if a significant amount of shareholders dissent, the SPAC is liquidated and the trust cash is distributed to all shareholders. The majority of an investor's initial investment, plus interest accrued, less operational expenses, will be returned if the deal is deemed not favorable by the holders of the SPAC's voting common shares. This gives a SPAC investor a limited downside with a potentially unlimited upside. SPACs also offer a fair amount of uncertainty at IPO. Many SPACs typically do have a target industry in mind, but charters often allow for investment anywhere an accretive acquisition can be found. Also, since SPAC charters can range from 18 to 24 months with a proposed acquisition occurring at any point during that time period, there is additional uncertainty with the length of investment at IPO. The ability to reject a deal provides limited downside while the ability of management to find a strong acquisition candidate provides potentially unlimited upside. Although dilution and uncertainty are detriments to investment, SPACs provide a unique and compelling investment for a portion of an investor's portfolio. ----- Christopher Raby is a senior taxable fixed manager/fixed income analyst for Karpus Investment Management, a local independent, registered investment advisor managing assets for individuals, corporations, nonprofits and trustees. Offices are located at 183 Sully's Trail, Pittsford, N.Y. 14534; phone (585) 586-4680. Published: Fri, Mar 13, 2015