Why SPACs are having their day as one of Wall Street's hottest investment trends

·6-min read

What do the space tourism company Virgin Galactic, the US sports betting firm DraftKings and the electric truck maker Nikola have in common?

The answer is that they have all arrived on the stock market via what are known as Special Purpose Acquisition Companies (SPACs), sometimes referred to as 'blank cheque' companies, currently one of the hottest trends in investment circles.

Not a day seems to go by on Wall Street at the moment without someone or other either announcing that they are setting up a SPAC or some company or other announcing it is coming to market via a SPAC.

Some of the best-known names in Wall Street and Silicon Valley are in on the act, as are big names in US sport and politics.

Among those who have launched or who have said they plan to launch SPACs include Larry Kudlow and Wilbur Ross, respectively Donald Trump's former top economic adviser and former Secretary of State for Commerce; Reid Hoffman, the co-founder of LinkedIn; the former basketball star Shaquille O'Neal and Billy Beane, the baseball player and executive whose story was made famous in the book and film Moneyball.

Others playing in the field include Paul Singer, the founder of Elliott Associates, the activist investor whose arrival on the shareholder register usually strikes fear into the heart of the toughest chief executives.

Paul Ryan, the former US Speaker of the House of Representatives, is another.

So too is Bill Ackman, the hedge fund manager behind Pershing Square Holdings, which joined the FTSE-100 just before Christmas.

He recently described SPACs as "one of the greatest gigs ever".

The next to put a foot in the water, according to a Bloomberg report, could be James Murdoch, the former chief executive of Sky, the owner of Sky News.

Some financiers have launched more than one SPAC.

One of the most prolific has been the billionaire investor Bill Foley, owner of the Las Vegas Golden Knights ice hockey team, who according to Reuters is set to launch two more SPACs this week.

Chamath Palihapitaya, the venture capitalist, has already brought four companies to market via SPACs, including Virgin Galactic, where he also became chairman.

He is now working on his fifth SPAC.

So what are SPACs and why are they so popular?

Essentially, they are companies that float on the stock market with no assets, but which raise a sum of money from investors - which can run into billions of dollars - with the specific intention of merging with a private company looking to come to market.

The SPAC then has a set period, usually two years, in which to identify a target.

If it fails to do, so the money is returned to shareholders.

Once a target has been identified, it merges with the SPAC, obtaining a stock market listing in the process and its shares become publicly tradeable for the first time.

The idea is not a new one but has soared in popularity during the last year for a number of reasons.

Firstly, it is a quick route to market for a company seeking to list.

Stock market flotations can be drawn out, involving weeks or even months of presentations to would-be investors, distracting management from the day-to-day running of their company.

Coming to market via a SPAC is comparatively quick.

It also allows unconventional or loss-making companies, which might not necessarily be able to float in the traditional way, a route to market.

This is particularly the case for young companies, often in the tech space, which can only highlight their attractions to investors with growth projections rather than with established track records and or a detailed financial history.

Another benefit, for company owners seeking to bring their business to market via a SPAC, is that it is often quicker and easier to negotiate a price or valuation with a SPAC sponsor than it is by relying on the traditional method - by which the investment banks paid to bring a company to market and the fund managers to whom they try and sell the shares haggle over a price.

There is more certainty about the process for company owners seeking to bring their business to market.

SPACs have generated plenty of great stories during recent months, such as Luminar Technologies, a driverless vehicle technology supplier which came to market via a SPAC in December, making its 25-year old founder a billionaire in the process.

The sums raised have been astronomic.

According to the website SPACInsider, some 248 SPACs came to market last year, raising $83bn (£59bn) in the process.

This year, already, 127 SPACs have raised $37bn (£26bn).

In other words, momentum is gathering pace, while today felt like the busiest day yet for SPACs.

No fewer than 11 SPACs announced the pricing of their Initial Public Offering (IPO) while a number of other companies announced plans to come to market via mergers with SPACs.

They include the hydrogen fuel cell truckmaker Hyzon, which is merging with the SPAC Decarbonization Plus, giving it a valuation of $2.7bn (£1.9bn) along the way.

Another is Volta Industries, a maker of electric vehicle charging points, which will be valued at more than $2bn (£1.4bn) after coming to market via a merger with the SPAC Tortoise Acquisition II.

The latter's shares surged by 47% on news of the deal.

The IPOs announced today give a good example of what is exciting investors right now.

There was Priveterra Acquisition, a SPAC targeting the medical technology sector, which is led by the experienced healthcare executive Robert Palmisano.

It raised $240m (£171m).

There was Progress Acquisition, which is targeting companies in the media, entertainment and technology space, which raised $150m (£107m).

And there was GigCapital4, which raised $312m (£223m) and which was the fourth SPAC - hence the name - launched by Avi Katz, an executive from the semiconductor industry.

In one sense, it is hugely exciting.

The companies coming to market are nearly all based on emerging technologies and epitomise the types of businesses that will drive both economic growth and improvements in living standards in coming decades.

Not all of them, though, will stay the course.

Many of them, having never made a penny profit, may never do so.

Yet along the way they are attracting, in some cases, vast sums of money.

These valuations are a symptom of the cheap money policies being pursued by the US Federal Reserve and other central banks around the world.

Others include the stupendous valuations being applied to 'alternative assets' such as Bitcoin and other cryptocurrencies, the mania that has attached itself to Gamestop and other bombed-out stocks, a fall in junk bond yields to hitherto unseen levels and the rising proportion of the sovereign debt market now trading with a negative yield.

In short, it all feels worryingly frothy.