How the SPAC craze took hold of the capital markets


How the SPAC craze took hold of the capital

Capital market trends come and go. Some make a big footprint, and some leave only a small mark.

In recent years, the investment space has seen the rise of special purpose acquisition companies, better known as SPACs. SPACs aren’t a new method for companies to get listed on the stock exchange, but this approach to investing has certainly gained more momentum than in the past – and eventually fell back.

Here’s a look at why SPACs have become so popular and what the market thinks about them now.

SPACs are attracting the attention of investors

A SPAC is a shell company that launches a public listing with capital to back it up. She then uses this capital to enter the market and pursue an acquisition target to align and start her business.

This tactic can be confusing at first, but one benefit is the protection initial investors can see from the fundraiser.

“It’s an attractive structure where investors have some downside protection,” said Nawan Butt, portfolio manager at Purpose Investments. “Most of the risk actually lies with the founders.”

However, despite these protections, SPACs were called in for their nature of expansion/collapse and what now remains of some big name failures in space.

Failure of a SPAC can happen like any other publicly traded company: poor financial results, lackluster management, missed opportunities, or just plain bad strategies.

But the SPACs have another particular way of seeing a slowdown. When the company comes to market, it is expected to secure its acquisition target within a specified time frame. The acquisition is commonly known as a qualifying transaction, which then activates the business.

“The attractiveness of SPACs is going to diminish because you have to look at the dilution that happens after the SPAC makes its qualifying trade,” Butt told Investing News Network.

SPACs capitalized on a bad year for IPOs

After a poor year 2019 for initial public offerings (IPOs)SPACs seemed to offer a turnaround for accessible capital with an added level of investor protection, so they took off significantly.

At the end of 2020, the SPACs had raised an impressive US$79.87 billion in raw product.

“The reason we’ve seen SPACs take off over the past few years is that…investment opportunities have narrowed as investment opportunities have become more expensive,” Butt explained.

Watch the video above to learn more about the legacy of SPACs and their role within the cannabis industry.

Don’t forget to follow us @INN_Cannabis for real-time updates!

Securities Disclosure: I, Bryan McGovern, have no direct investment interests in any of the companies mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or completeness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the views of Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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