By Daniel Roche, CPA/ABV, ASA and Stefanie Jedra, CPA
The year 2020 may best be known for COVID-19, but it was also the Year of the SPAC. Everyone has one now – from high powered Wall Street investors to celebrities like Shaquille O’Neal, Serena Williams and A-Rod. But what are SPACs and why did they rise to such prominence in 2020? The answers to these questions are not that difficult. What may be difficult however is the valuation of these speculative investments and how that may affect our clients.
Special Purpose Acquisition Companies, better known as SPACs, have been around for decades. They are basically publicly-traded cash shell companies (with no operations), with the ultimate goal of acquiring a privately held operating company. Upon acquisition, this privately held operating company will then become a public company without having to go through the rigor of an IPO process – the IPO process for a cash shell company is much simpler. Basically, a privately-held operating company either “reverse merges” or is combined with the public cash shell, and viola!, it’s a public company (slightly oversimplified).
The economics around SPACs are also very interesting. Most SPACs are funded through sponsor investors. These sponsor investors provide cash to the SPAC in return for “Units” in the SPAC. Units typically consist of one (1) common share and one (1), ½ or ¼ of a common share warrant to buy shares in the SPAC in the future at a specified price. Investor cash is then held in a trust earning interest during the period where the SPAC locates a target company to acquire. The SPAC then has a finite amount of time to identify and acquire a privately-held operating company – this timeframe is typically between 21 months and 24 months. If an acquisition is not made during this time period, investor cash (plus interest) is returned and the SPAC fails. However if the SPAC does make an acquisition, significant returns on investment can be had. This is because, typically, SPACs look to acquire companies that are significantly larger (4x – 6x) their initial capital funding and will look to the private markets to raise capital once a target company is identified. Therefore, SPAC sponsor investors, some of whom could be your clients, could reap significant returns on their investments if and when a successful acquisition takes place.
While the shares of the SPAC are publicly traded, there is a time period between the IPO of the cash shell SPAC and the acquisition of a privately held company. Between this time period, investors with significant influence, who may be your client(s), participate in due diligence and vote on any potential merger. This process is not public and therefore the publicly traded shares will not reflect this activity. However, the knowledge of this activity does exist.
As you’re probably now thinking, the valuation of equity and derivative investments in SPACs can be quite complex. Let’s consider the impact on the valuation of SPAC investments in the divorce arena. With the significant amount of SPAC IPOs in 2020 and 2021, it is likely that we, in the divorce community, will begin to see more and more of these investments sponsored by our clients – or the marital estate in which we are involved. Since the success of a SPAC is ultimately rooted in a successful acquisition made by this SPAC, there can be significant amount of speculation around the ultimate returns of these investments. This is where niche expertise comes in. As always, the concept of known or knowable will be a primary issue in the valuation process as well as the rigor of any amount of due diligence done by the SPAC around a potential acquisition and the ability to acquire information related to these transactions.
Marcum LLP is the #1 firm bringing SPACs to market. Our practitioners have worked through vetting large amounts of external valuations of investments in SPACs and have significant institutional knowledge. If you find that your clients have investments in SPACs or similar investment vehicles, please reach out to us for advice.
