The most exciting thing in finance is four letters long. Former NBA star Shaquille O’Neal has one. Just like former House Speaker Paul Ryan. The same is true of silver-haired hedge fund billionaire William Ackman.
It is called a SPAC and is increasingly the preferred source of funding for private companies looking to go public. Richard Branson’s space exploration company Virgin Galactic Holdings Inc. went public in 2019 through a SPAC, and sports betting DraftKings Inc. did that last year. Nearly 300 SPACs are now looking for deals, armed with about $ 90 billion in cash. And more to come with a furious clip – so far this year, an average of five new SPACs are launched per working day.
“If you don’t have your own SPAC, you are nobody,” said Peter Atwater, founder of research firm Financial Insyghts.
SPACs – which stands for special acquisition companies – are essentially large pools of cash that are listed on a stock exchange. Their goal is to find a private company, buy it, and make it public quickly. Some on Wall Street call them “blank check companies” because the investors backing the SPAC withheld their money months before a takeover target was identified and trust the people running the show to find a good deal.
These deals are generating a lot of interest as they bring in big wages for their makers, make it easier for startups in hot industries like electric vehicles to take advantage of a frothy run-up to the stock market, and they offer everyday investors a new path to hot stock. When a SPAC buys a company, it merges with it in a sort of accelerated IPO process – called a “reverse merger” – while bypassing the normal control an IPO receives.