SPACs are back

IN NOVEMBER 2010, a US$3 billion transaction was announced to form Bumi plc. Well-known names in the world of business and finance were behind it. Bumi's share price rose sharply by more than 40 per cent in the next few months. That would mark its permanent peak. The London-listed natural resources group went on to lose almost all its value amid a sharp fall in commodity prices and an intense corporate battle, and was eventually delisted. Bumi plc was the largest Special Purpose Acquisition Company (SPAC) in that previous cycle.

SPACs are back with a bang. 2020 has been a banner year with over US$30 billion raised so far via SPACs. Major acquisitions have been completed including that of Richard Branson's Virgin Galactic by a SPAC sponsored by Chamath Palihapitiya that had raised US$650 million in 2017. The venture currently sports a market capitalisation of over US$5 billion. Virgin Galactic has not actually commercialised a single spaceship and promises revenues (that is correct, revenues) three years down the road. Other SPAC acquisitions have included similar futuristic ventures such as Lordstown Motors and Nikola which makes electric and hydrogen-powered vehicles. Even well-known investors with access to other deep pools of capital such as Pershing Square and Apollo have rushed to join the SPAC bandwagon. Could things go horribly wrong once again?

SPACs are listed cash shell companies backed by a sponsor who puts up some of the capital (around 5 per cent). The initial investors are usually hedge funds. The sponsor promises a suitable acquisition within a defined timeframe on which the investors have a veto. If an acquisition is not completed, investors get their cash back with a small return. On the other hand, there are also strong incentives for both the sponsor and the initial investors (via equity options) to see an acquisition completed.