The hottest trend in finance? ‘Blank check companies’

SPACs (AKA ‘blank check companies’) are storming public markets

What do Virgin Galactic (space exploration), Nikola (EV trucks) and DraftKings (sports gaming) have in common — other than the letter “a”?

The hottest trend in finance? ‘Blank check companies’

All 3 went public through a special purpose acquisition company (SPAC), a financing arrangement that’s gone gangbusters in recent months.

Also known as “blank check companies,” SPACs raise money from the public for the express purpose of merging with an existing company.

SPACs were founded in the 1990s

But they’re having a moment in 2020: So far this year, we’ve seen 78 SPAC IPOs — more than any year on record.

DraftKings (April) and Nikola (June) both went public with SPAC mergers.

Hedge fund manager Bill “don’t call me SPACman” Ackman recently raised the largest SPAC ever. Investors gave him a $4B blank check to “marry a unicorn” (AKA billion-dollar private tech company).

Even former House Speaker Paul Ryan — I repeat, Paul Ryan — is getting in on the action.

Why are people SPAC-ing?

Anuj Abrol — founder of the Witty Wealth newsletter — tells us why market participants are hot for SPACs:

  • Sponsors (AKA parties raising SPAC funds): They get 20% of the SPAC just to run it and, often, only have to put up <5% of the money.
  • Companies: Private companies can avoid the onerous (and long) IPO process and go public by dealing with one entity (the SPAC).
  • Investors: Get access to higher-risk/higher-reward companies that would otherwise not go public via the IPO process.
And, there’s no end in sight 

With markets relatively frothy, those looking to cash in on the good times can certainly benefit from the speed advantage that SPACs offer.

Just yesterday, Bloomberg reported that Peter Thiel-backed Luminar Technologies (a driverless car startup) is hitting public markets using the SPAC track.

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