Blank Check Companies – The ‘In’ thing of the year 2020

The search for better returns in a low-rate world has resulted in quite a few innovations in the world of finance and ‘Blank Check Company’ is one such innovation.

Now let us try to make out as to what is a ‘Blank Check Company’. The formal name of these Blank Check Companies is ‘Special Purpose Acquisition Company, or SPAC.

SPAC is an investment vehicle that goes public despite having no real business. The plan is to raise money from investors and use it to buy into another company, typically a private one that is yet to be identified.

SPACs typically go public at $10 a share and have 24 months to find a target. If the company fails to identify one, it liquidates, and investors get their money back.  Investors also get to vote on a deal and have a chance to redeem their shares whatever the result.

Therefore, SPACs tend to trade around their $10 price until a deal is announced (or sometimes rumored). In addition, the initial investors in a SPAC get warrants, which entitle them to buy more shares at a set price after the company makes an acquisition.

The SPACs boom stems from the convergence of two big trends and an old constant. The first is historically low interest rates. With safe bonds paying less than 1% and stocks trading at high valuations, more investors are willing to park their money with a SPAC in hopes of getting lucky with an acquisition that pays off big. Second is the long-running boom in private equity and venture capital. Investors who poured money into buying companies over the past decade want to cash in by selling them. So there are plenty of companies for SPACs to buy. Add to these an old constant: financiers looking for new ways to earn a fee from a transaction.

The current pandemic-induced market environment is tailor made for SPACs. The current volatility is making it difficult for conventional companies to go public. Therefore, purchase by a SPAC can be an easier way for a private company to go public: It can skip the usual roadshow for pitching investors and avoid some of the scrutiny that goes with an IPO.

The investors in SPACs are typically institutions such as hedge funds, and these SPACs offer them the combination of a relatively small downside with a chance to make a tidy profit down the road.

As per Bloomberg, More than 40% of 2020’s IPOs by volume have been SPACs, raising $31.6 billion, more than double all of last year’s volume of $12.4 billion. Currently there are 120 SPACs with $40 billion to spend, according to data from SPAC Research.

(Compiled from various sources)