A new hype finally for Wall Street! Since bitcoin has gone mainstream and corona taken charge of markets, investors have been waiting for something exciting and new, Michael Bornhaeusser explains in an essay for finews.first.
This article is published on finews.first, a forum for authors specialized in economic and financial topics.
Here's the latest exciting story: Special Purpose Acquisition Companies – SPACs in short – are the new hype on the financial market. By definition, SPAC is a shell company that acquires capital through an initial public offering before listing as a non-operational firm on the stock market.
The money that is parked within the shell is earmarked for the purchase of a yet to be identified company. Until the money is needed, it is put on hold and invested in short-term U.S. government fixed-income securities. Once a company has been acquired by the SPAC, it is merged with the latter and thus gains access to a listing for a reasonable price.
«It seems to work»
It is reasonable to ask why an investor should put money into a shell without knowing what it will be used for. This has only become possible because of ultra-low interest rates and the need for investors to place their cash. Furthermore, there is a large number of firms that are financed by venture capital or private equity and are looking for an exit strategy, avoiding the exorbitant costs and the complexity of a traditional IPO.
And it seems to work: people in the know say that 2020 was a record year for SPACs. They raked in some $36.2 billion, which is three times the amount of 2019 when SPACs collected only $13.2 billion in total.
«Top managers including Sergio Ermotti have put their names on a SPAC»
Reputable companies including Virgin Galactic, Draft Kings, and Lunina have been put on the stock market via a SPAC and prompted a surge in interest for such vehicles. Top managers including Sergio Ermotti have also put their names on a SPAC, as was reported by finews.com last week. The venture capital industry of the U.S. is abuzz, with some companies receiving at least one call a week from a SPAC, inquiring about whether it would make sense to list a company via a SPAC.
Personally, I would like to add that from our portfolio, we had two companies completing an IPO over the past years – Lending Club and Farfetch. They were valued at $4 and $6 billion respectively. Both companies went through an arduous and hugely expensive process.
«An exit would be premature»
What has become clear is that it doesn't make sense to conduct an IPO for a company that hasn't yet reached the status of a unicorn (valuation of a billion or more). The effort simply isn't worth its while if the company's valuation is too small. Under such conditions, using a SPAC for a company financed through venture capital can be a useful means to generate cash and instigate an exit. Here are a few examples:
For one company, we considered a short-term SPAC-exit to be possible, but the firm is properly financed and we can more than double the value of the company over a twelve-month period through our own means. An exit hence would be premature.
«This makes it no real exit strategy for the investors»
At another company, sales aren't substantial enough to achieve a valuation that would make the company an interesting proposition for institutional investors on the stock market. This means that in the case of a SPAC transaction, the firm would have a listing on the market, but the trading volume would remain only very marginal. And therefore, this makes it no real exit strategy for the investors.
At a third company, the exact opposite holds true. The company is growing massively, reaching a valuation that would justify a full IPO. The high costs of an IPO are justified by the expected valuation, which is higher than what could be achieved through a SPAC.
«Otherwise, you risk being part of a hype without getting a proper reward»
In conclusion, cost and effort are lower through a SPAC exit – but the valuation compared with a classic IPO is also lower, because an IPO still attracts more investors, which helps boost the price.
SPACs are an interesting option for an exit strategy. But the timing and the situation of the company has to be 100 percent right. Otherwise, you risk being part of a hype without getting a proper reward.
Michael Bornhäusser is the chairman and managing partner at Bulb Capital, a venture capital firm founded in 2019. Previously, he led the private-equity and products business of Swiss private bank Sallfort. In the 1990s, Bornhaeusser worked as an entrepreneur in IT. He co-founded Pixelpark, which went public in 1999. Since the start in 2019, Bulb has invested $180 million in 12 startups in the U.S., the U.K., and Latin America, participating in 16 rounds of financing and achieving successful exits.
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