Facts about SPACs: Is this vehicle right for you?

The popularity of SPACs has surged over the past year sparking a fair amount of buzz in finance media. But will this trend continue? And is the instrument a good fit for your needs? Explore our research below.

Tags: Investing, Investments, Trustee, Administration
Published: April 14, 2021

Special purpose acquisition companies (SPACs) are having their moment in the sun – and it’s a moment that doesn’t appear to be ending anytime soon. SPAC growth soared last year, due in part to COVID-19 interfering with traditional initial public offering (IPO) plans. Now, experts predict the trend will continue to accelerate through 2021 and beyond.

“SPACs have evolved from a specialty niche market into a global, multibillion-dollar vehicle,” says Peter Mastriano, senior vice president at U.S. Bank Global Fund Services. “In 2020, gross proceeds reached $79 billion, a 480 percent jump from the year prior."1

If you’ve been hearing a lot of coverage and commentary about this vehicle recently – or you’re considering sponsoring one – we’ve done some research to help you better understand the opportunities they offer. In this article we’ll look at what SPACs are, why they’re so popular and how you can leverage the expertise of an experienced, full-service partner to use them to their maximum potential.

 

What is a SPAC?

A special purpose acquisition company functions as a vehicle for raising capital in an IPO then using that money to acquire the ownership share of a targeted private company (or companies). Often referred to as “blank check companies,” SPACs enable investors to take a private company public with more speed and less uncertainty than the traditional IPO process. Once the deal is made and the company acquired, shares of the SPAC can usually be bought and sold on stock exchanges. 

 

“SPACs have evolved from a specialty niche market into a global, multibillion-dollar vehicle. In 2020, gross proceeds reached $79 billion, a 480 percent jump from the year prior.”

 

How do SPACs work and who’s involved?

SPACs sell “units” in the IPO (similar to drawing capital from limited partners with private equity funds). The units are then separable into shares and warrants post IPO. Funds that were placed in the trust account at the IPO closing are moved to the asset management bank where they’re invested in accordance with the SPAC’s directions.

To launch a SPAC, sponsors need to build a team made up of the following parties:

  • Lawyers and underwriting banks
  • Accountants
  • Transfer agency for the securities
  • Asset manager
  • Trustee to hold and manage the IPO funds
     

How popular are they really?

Since the advent of the modern SPAC in 2003, SPACs have grown in popularity from a specialty niche market to a global, multibillion-dollar vehicle.

SPAC investing is accelerating, and that acceleration is expected to continue through at least 2021. At U.S. Bank, our research indicates SPAC sponsorship is especially prevalent among alternative asset managers, as well as business executives and companies looking to raise capital for projects. Private equity and hedge fund firms launch the vast majority of SPACs. It’s also worth noting that private equity firms are especially well-positioned for SPAC utilization as they’re able to draw on and benefit from their robust in-house due diligence capabilities.

Highlights from our research include:

  • The future for SPACs is strong with 235 launches in 2020, representing a 300 percent and 410 percent increase over 2019 and 2018, respectively.2
  • Similarly, gross proceeds reached $79 billion in 2020, representing a 480 percent and 630 percent increase over 2019 and 2018, respectively.3
  • Average IPO size for a new SPAC reached $336.2 million in 2020.4

 The growth of SPACs

The chart below5 illustrates just how dramatically SPAC growth has accelerated, especially over the past year.

 

Key considerations when launching a SPAC

Sponsoring a SPAC can be a little tricky, but an experienced partner can help you navigate the process.  Look for a broadly capable, well-resourced service provider to assist you with trustee, fund administration, investment and disbursement services related to your SPAC transaction.

When selecting a service provider for your SPAC, choose one that meets the following criteria:

  • Experienced professionals with a history of success in capital markets transactions
  • Ability to hold large sums of money in a safe, stable environment
  • Accuracy and responsiveness in handling investment and disbursement upon direction
  • Experience in working directly with deal parties

The importance of full-service, end-to-end support

Successful SPACs require experienced, top-level support – an administrator with broad resources and flexible solutions to accelerate growth. Since SPACs are registered products, many services you rely on for registered funds can also be applied to SPACs. Some of these overlapping services include the following:

  • Escrow services
  • Accounting
  • Financial reporting
  • Regulatory reporting
  • Tax reporting
  • Transaction processing (distributions and liquidation events)
  • Trustee services
  • Custody services and treasury solutions

At U.S. Bank, we have a long, successful track record servicing registered funds, and we can help you with the following SPAC-specific requirements and more:

  • Establishing a special purpose segregated trust account to hold SPAC proceeds
  • Holding, investing and disbursing of funds in accordance with trust agreement
  • Providing statements and secure online reporting of account holdings and activity

“Our integrated, end-to-end solutions are designed to meet all your SPAC-specific fund servicing and trustee needs with a single provider,” says Lars Anderson, senior vice president and sales manager at U.S. Bank Global Corporate Trust. “Our customized solutions integrate with your existing workflows to streamline processes, decrease turnaround times and improve the quality of investment and disbursement services.”

It’s clear that SPACs are a hot trend for a reason, and their strong growth seems likely to continue. If they’re a good fit for your needs, position yourself for success with a team that offers end-to-end solutions, industry insight and service expertise you can trust.

 

 

U.S. Bank offers customized operational solutions combined with the strength and security of a major financial institution. To learn more, visit our website or connect with our team.

 

 

 

1,2,3,4 Source: spacanalytics.com (12/09/2020)
5 Source: 2020 Convergence data
U.S. Bank Global Fund Services is a wholly owned subsidiary of U.S. Bank, N. A. Custody, lending and treasury services are offered by U.S. Bank, N.A. U.S. Bank does not guarantee products, services or performance of its affiliates and third-party providers.
U.S. Bank Global Fund Services (Ireland) Limited is registered in Ireland with the Companies Registration Office Reg. No. 413707 and Registered Office: 24-26 City Quay, Dublin 2, Ireland. U.S. Bank Global Fund Services (Ireland) Limited is authorised and regulated by the Central Bank of Ireland under the Investment Intermediaries Act, 1995.
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