In times of zero or extremely low interest rates, there is a lot of liquidity looking for high-yield investment opportunities. In the past, for example, this led to a run on new issues - also known as IPOs, Initial Public Offerings. In the latest bull market, an investment opportunity with a cryptic abbreviation is also making a name for itself: the so-called SPACs. In the following we will tell you what they are all about.

What are SPACs?

SPAC stands for "Special Purpose Acquisition Company". They are shell companies that are set up solely for the purpose of acquiring another company at a later date. The potential takeover candidates are usually companies that are not yet listed on the stock exchange. A SPAC obtains the capital for this venture in the course of an IPO, in which it raises money from investors in exness client area. In this respect, the whole thing is similar to a normal new issue.

However, in the case of a SPAC, it is not yet clear at this point in time what will actually be invested in. As a rule, there is only a guideline regarding the industry and size of possible takeover candidates. The final selection is made by the management of the SPAC. However, the shareholders have a say. Before the final takeover, their approval is required at the general meeting. If they refuse, the SPAC is dissolved and the capital collected is repaid. The same happens if there is no takeover within a predefined time frame, for example 24 months.

The advantages of SPACs over IPOs for stock market candidates

Being taken over by a SPAC is an interesting way for start-ups in particular to go public. The otherwise existing hurdles for an IPO are eliminated because the SPAC is already listed on the stock exchange. This is also reflected in a quick settlement, which makes it possible to take advantage of a positive market environment in good time. No wonder that IPOs via the "shortcut" of a SPAC are soaring in the USA. This is shown by the figures from the "Top of Mind" report of 28 January 2021 by Goldman Sachs: in 2020, 50 percent of all IPOs in the United States took place via SPACs.

Great opportunities with SPACs are offset by high risks

Investors in a SPAC can literally hit the jackpot - if they succeed in acquiring an up-and-coming company. What is interesting here for private investors: Unlike with normal new issues, with SPACs you are not usually competing with institutional investors for an allocation. This makes it easier to get hold of shares.

But SPACs are also subject to criticism. To prevent abuse, the money collected from investors in a SPAC must be deposited in a trust account. But this does not rule out other risks.

The most important aspect: whether the investment ultimately pays off stands and falls with the quality of the acquired company. The management has a blank cheque, so to speak, to find a suitable candidate and to assess him. A possible problem here is the incentive to quickly complete an acquisition before the deadline. In this case, the founders of the SPAC receive a share of 20 per cent of the shares.