This article is the final installment to my three-part series on investment. To start at the beginning of the series, read “Interpreting Investment Part 1: Going Public via Route SPAC!”
Q: What are the benefits of Special Purpose Acquisition Companies (SPACs)?
A: By merging with a SPAC, a company is able to go public and gain capital quicker than with an IPO, which can take around six months to acquire and requires fulfillment of SEC (Securities and Exchange Commission) regulations and restrictions. In addition, as the use of SPACs has increased. More well-known investors have created SPACs and more SPAC acquisitions have occurred, such as Diamond Acquisition Legal Corporation that merged with DraftKings, fostering further credibility to this investment model. This increased credibility has since drawn more investors to purchase shares in SPAC IPOs, which has enabled SPACs to raise large amounts of capital and merge with more large, mature, and high-profit potential companies that SPAC shareholders are more likely to approve of and continue being shareholders in after the de-SPAC transaction. Also, the target company, the private business being acquired by the SPAC, is able to negotiate its own issue price with the SPACE sponsors, unlike in an IPO where a company’s value is largely determined by an underwriter.
Q: What are the drawbacks of SPACs?
A: Of course, too much of a good thing is never sustainable. In light of the 2020 surge of SPACs, the SEC published new disclosure guidelines that are focused on the potential conflict of interest between a SPAC’s public shareholders and a SPACs leadership team. If a SPAC does not clearly define the interests of insiders and the interests of shareholders, the SPAC could be slammed with SEC enforcement investigation and actions which could open expose the SPAC to lengthy, expensive civil lawsuits filed by dissatisfied SPAC shareholders. SPAC critics also warn of the risky investments that SPACs can make in order to merge with private companies within the two-year time span allotted to SPACs to utilize their SPAC IPO trust built on the investments of SPAC shareholders. This business model then intentionally “incentivizes promoters to do something — anything — with other people’s money [which] is bound to lead to significant value destruction on occasion.”
Q: What would be an exemplar SPAC?
A: Though the idea of blindly investing in a shell company is risky, recall that SPACs are established by seasoned professional investors. Victoria Grace, the founder of the $300 million Queen’s Gambit Growth Capital SPAC, spoke on a podcast, Axios Re:Cap, sponsored by Morgan Stanley about the 2020 surge in quality SPACs. Grace emphasized that a SPAC merger is more than just transferring capital to the target company. As long as the quality and trust are maintained between SPAC management and the target company, a profitable partnership can be made between the SPAC and the business acquired.
Q: Why is the management team of a SPAC important to investors?
A: Essentially, when an investor decides to buy shares in a SPAC IPO, they are making a bet on the management team of the SPAC. At Queen’s Gambit, that management team is a group of all-female professional investors who come from a variety of business backgrounds and who all value integrity in their field. The Queen’s Gambit is one of the oldest chess openings used by the most experienced chess players, so it is not surprising that Queen’s Gambit Growth Capital is crushing the SPAC and investment industry with their years of experience and thoughtful, in-depth planning that puts this female-driven group ahead of their competition. When asked about the “SPAC bubble” and its potential to pop, Grace described that if the management of a SPAC is experienced in the ups and downs of the market and has invested in long-term, viable target companies, then that SPAC is here to stay.
The Queen’s Gambit Growth Capital is just one of the many SPACs that have forged a new avenue for private businesses looking to go public. This upward trajectory is only expected to continue as the investment industry evolves. Though we may not be seasoned, professional investors with our own million-dollar SPACs, it is up to us as today’s shareholders to influence tomorrow’s market.
Thank you for reading my series on investment! If you want to learn more, check out any of these resources below.
About IPOs: read here.
About SPACs: read here.
About Queen’s Gambit Growth Capital: read here.