SPACs, or Special Purpose Acquisition Companies, are an important factor to consider when taking a company public. Any business leader should be attuned to this method, which has seen an increase in popularity in recent years, as it gives your organization another avenue to raise more capital. But with the pros come the cons and that’s why it is critical to understand what SPACs are and how to understand their value in the marketplace.
Many people are evaluating the SPAC market and having second thoughts about whether or not their company is ready to go public. So many launched at the end of 2020, in the midst of uncertain economic times, but the momentum eventually leveled out in the spring of this year. But this doesn’t mean SPACs are going anywhere. They are still a perfectly viable option to take your company public—as long as leaders correctly assess the health of their company and if they are ready to take this next step.
The Pros and Cons of SPACs
In 2019, there were fewer than 60 SPACs. There are 400+ SPACs currently looking for targets, with about 200 more in the pipeline. Where and when those targets will emerge is the more pressing question. Taking your company public helps raise funds with a lower cost of capital, gives you currency as a company, more opportunities for mergers and acquisitions, and the prestige you need to attract top talent. There’s a lot of appeal in SPACs, but equally as much to consider when deciding on this route.
Many companies chose to go public via SPAC in lieu of late-stage fundraising. For some people, this has its advantages over a regular underwritten IPO. SPACs have a much faster execution, with SPACs merging into their target companies in 3-6 months on average, versus IPOs, which traditionally take 12-18 months. IPOs require exhaustive regulatory filings, are underwritten by investment banks, and companies have to go find a group of public equity investors to take interest in their company.
This process is considerably time-consuming. This is one of the many reasons SPACs became so appealing—less time spent means fewer fees. In the first quarter of 2021, they made up roughly 28% of US deals. Just because the pace slowed this spring doesn’t mean they are disappearing. They just need to be appropriately utilized. In his blog, CEO and investor Mark E. Watson III discusses why SPACs are still a viable go-to-market strategy, and what company leaders need to know in order to best utilize this method.
“While saving money is certainly important, the real advantage of SPACs is that they provide more certainty. The reason why one chooses an IPO via SPAC isn’t so much about saving money, but about getting the deal done,” Watson says. Another big advantage of SPACs is that they are not dependent on or sensitive to the market conditions like IPOs, and give some space to negotiate. SPAC mergers also don’t need to generate the same level of interest or fanfare for investors. Right now, there is a fair amount of investor appetite for IPOs as long as they are seasoned companies as opposed to start-ups with a pitch budget.
If you’re thinking about taking your company public, these things should be top of mind. If you don’t think your company is ready, take a step back and reassess your options. Remember, the private equity markets are still flush with cash as well. It can be done and done well but only if your business is truly ready to go public.
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