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SPAC Overview
SPACs are newly formed companies that raise equity capital through an initial public offering for the sole purpose of pursuing a business combination in a dedicated industry or geographic location. The offerings are typically sponsored by experienced corporate executives, managers of private equity firms and seasoned entrepreneurs.
The offering is in the form of a unit, comprised of a common share and warrant(s). The offering proceeds are held in escrow in an interest bearing trust account. Immediately following the offering, the SPAC typically has 18 months to announce an acquisition and then an additional six months to receive shareholder approval of the proposed business combination. The sponsors typically receive founder shares or units for 20% of the company, which have value only if an acquisition is completed.
If an acquisition is not completed within the allotted 18 to 24 months, the cash held in escrow is liquidated and shareholders are returned their prorated cash amount. This typically would lead to an investor having 90-100% of their initial investment returned. Currently, SPACs trade on the over-the-counter bulletin board, the NASDAQ, the American Stock Exchange, and in Europe on NYSE-Euronext, the Alternative Investment Market (AIM), a subsidiary of the London Stock Exchange.
SPACs are unique structures in that they are similar to private equity, but with freely tradable securities that provide transparency because they are regulated by certain SEC rules, requiring the filing of its financial statements. Since a SPAC's unit, stock and warrants are publicly traded, they provide the opportunity for liquidity to an investor when compared to hedge funds and private equity. Furthermore, the publicly listed common shares, warrants and units allow for varying investment strategies, arbitrage opportunities and risk management. In addition, the right of shareholders to vote in approval or rejection of the deal is a positive and unique feature offered to SPAC investors.
Investing in a variety of SPACs provides an alternative to mutual funds or hedge funds, and has various advantages over other capital structures which include hedging options, industry-specific experienced management teams and a multitude of worldwide acquisition targets. For the investor who requires liquidity coupled with principal protection, depending upon the structure, SPACs are potential investment vehicles.
With SPACs, investors rely on a management team and their ability to capitalize on their niche product knowledge to create a profitable company scenario for investors. SPACs compete directly with private equity groups and strategic buyers for acquisition candidates. The tightening of competition between these groups could result in multiple bids for the top tier companies and possibly increase a company's valuation. Link Capital is dedicated to offering our clients the best investment opportunities in a rapidly changing market.
Unlike hedge funds or traditional asset management vehicles, SPAC management teams have significant personal capital at risk. If the management team is unable to consummate a business combination, they lose 100% of their investment and investors are returned 90-100% of their investment. In addition, management receives no compensation prior to an acquisition.
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