British economist John Maynard Keynes famously wrote more than 80 years ago that people’s behaviour in the financial world is often driven by “animal spirits” that suggest “spontaneous optimism rather than mathematical expectations”. The current craze for special purpose acquisition company (Spac) listings is a good example.
Spac IPO volumes surged 5.5 times from $15 billion in 2019 to $83.48 billion last year, according to Dealogic. The volumes so far this year have already hit $107.6 billion: the vast majority come from the US, which accounts for 43% of the global IPO market.
There is good reason for the extraordinary boom in Spacs. Also known as blank-cheque companies, Spacs provide a way for high-profile businessmen to list shell companies – and raise money from investors – if they plan to make an acquisition within two years.
The premise is simple. If no company is acquired before the deadline, investors are refunded their money. If a deal does take place – a process often referred to as de-Spac – it enables the target company to go public while avoiding the hassle of detailed disclosures.
Will the rewards balance out the possible risks that may come from supporting these deals?
The benefits are many.