The hottest thing in finance is four letters long. Former NBA star Shaquille O’Neal has one. So does former House Speaker Paul Ryan. Same goes for silver-haired hedge-fund billionaire William Ackman.
It’s called a SPAC, and increasingly it is the favorite source of financing for private companies looking to go public. Richard Branson’s space-exploration firm Virgin Galactic Holdings Inc. went public through a SPAC in 2019, and sports-wagering firm DraftKings Inc. did so last year. Nearly 300 SPACs are now seeking deals, armed with about $90 billion in cash. And more are rolling out at a furious clip—so far this year, an average of five new SPACs launched each business day.
“If you don’t have your own SPAC, you’re nobody,” said Peter Atwater, founder of research firm Financial Insyghts.
SPACs—which stands for special-purpose acquisition companies—are essentially big pools of cash listed on an exchange. Their purpose is to find a private company, buy it and take it public quickly. Some on Wall Street call them “blank-check companies’’ because the investors backing the SPAC put up their money months before an acquisition target is identified, trusting the people running the show to find a good deal.
These deals are generating a lot of interest because they produce big paydays for their creators, make it easier for startups in hot industries such as electric vehicles to capitalize on a frothy run-up in the stock market and offer everyday investors a new path to a hot stock. When a SPAC buys a firm, it merges with it in a sort of accelerated IPO process—a so-called “reverse merger”—while bypassing the normal scrutiny an IPO receives.