So SPACs are all the rage. Read our previous coverage.
And we are not the only ones already speaking of the possible downsides to the whole SPAC phenomenon. At least this time around, it is fueled by wealth management and investment banking professionals who know what they’re doing. One hopes!
And as we continue our examination of this new approach to liquidity and raising capital, here are some pros and cons of going the SPAC route vs a more traditional IPO or Private Equity transaction.
The upsides are easy, and include certainty, speed, getting strategic capital aka smart money. There are other obvious benefits, the graphic below shows various things to keep in mind when consider the pros.
No free lunch
So there are obviously cons to the whole process, and there are two primary things to consider with SPACs. The first is the expense – the sponsor company often takes 20% of the target company before the deal is said and done. This is fairly significant dilution for a potentially late stage company.
The more important downside, however, may seem like an upside.
The lack of supply on the sell side, aka target companies.
We will see why.
SPAC, deSPAC, unSPAC
So typically the process involves two parallel threads – the management company that raises the SPAC, in preparation to find a target that they can take over – and somewhere off in the world, a target company in the making, unknown to its own future.
When SPAC met deSPAC
When the SPAC management locates a suitable target, they do the valuation and due diligence and so on, and get the deal signed, ready for the acquisition transaction. A second after the consummation of the transaction acquiring the target company, the purchased entity is effectively also publicly trading along with the acquirer SPAC.
This is the de-SPAC moment, when the SPAC is no longer a SPAC, but is now a business with operations and staff and revenues and profits.
As identified above, the problem is finding the right target company, ensuring the quality of the operations and cashflows and perhaps most importantly the growth prospects, all while doing it within 24 months.
The Digital SPAC aka UnSPAC
The problems identified here have led us to create the UnSPAC.
An UnSPAC also has two parts: the capital pool, and the target.
The whole operation happens digitally on a CapFac platform such as AwakeX, connected to networks of broker dealers, investment bankers, wealth managers, RIAs, and so on. The distribution side and the capital formation side are on the same rails, allowing the process to be efficient and multi-dimensional.
The target company is located using a ComFac platform such as Shoptype, which essentially is a real-time network of B2B2C market networks. A ComFac connects to a PayFac to actually move money between market network participants, but itself maintains the ledger of all network activity.
The CapFac is able to pull licensed data feeds from ComFac networks, and is able to use AI to find, filter, select, and package investment grade opportunities into digital units ready for distribution.
Faster, Cheaper …
Because the transaction happens totally digitally, the overhead and fees can be dramatically reduced. Instead of the traditional 20% that SPACs cost, which is incredibly high dilution, an unSPAC is typically 10%, of half that amount.
And because the target is also on the same ledger, it is faster and smarter to use unSPAC rails.
… And better
Finally, recalling that the CapFac is able to tap into the ComFac data feeds to locate and identify extremely precise real-time metrics on operations of potential targets, it is able to find better targets.
Not to mention, of course, that by definition, these target companies are ready for the digital future. Running on a modern ComFac engine allows businesses to leverage the power of the Internet in truly global ways, leveraging also supply chain and logistics AI that are weaved into modern ComFac engines such as Shoptype.
FinTech to empower Investment Banking 2.0
Again, a CapFac such as AwakeX are technology companies, connecting and enabling the future of financial services including but not limited to investment banking, wealth management, fund management, derivative traders, and others.
We continue to track activity within the SPAC universe, and are excited by what 2021 holds, but even more excited about the future of tech-enabled private equity.