SPACS ARE BOOMING: IS YOUR INVESTOR RELATIONS STRATEGY KEEPING UP?
Recently, few investment products capture the imagination like Special Purpose Acquisition Companies (SPACs). The sole purpose of these companies is to go public and raise money from investors so that they can buy or merge with private companies. This essentially allows smaller private companies to go public without navigating the hazards of the IPO process.
For investor relations, SPACs pose a unique challenge because with no financials to dissect, investors must rely on the track-record and reputation of the sponsor and the communications prepared for investor due diligence.
In the past, SPACs suffered from lackluster performance and endured a questionable reputation. However, they have seen a resurgence in the last 18 months due to low interest rates, the promise of more stability for investors in a volatile market, and greater speed and control of the IPO process for company executives that want to go take their companies public.
The diversity of industries who have benefitted from SPACs is far-reaching. For example, online gambling company, DraftKings, is up over 300%, and online residential real estate brokerage, Opendoor, is up 25% since going public. There is even talk of electric air taxi company, Joby, merging with Reid Hoffman’s SPAC. There have been some notable duds however. For example, electric truck company, Nikola, saw their CEO step down after allegations of misleading investors. This was the result of a promotional video in which a truck was rolled down an incline to give the impression of a working prototype.
The face of the SPAC resurgence is undoubtedly former Facebook executive, Chamath Palihapitiya, who has leveraged his charisma and social media presence to great effect. It is his savvy, according to Mark Cuban, that has made him stand out from the rest of the SPAC pack, “He knew what made them work and created a narrative that new investors could understand.”
The majority of Palihapitiya’s SPAC funding came from hedge funds that perceive SPACs as low risk. For example, investors can redeem their shares for the $10 they bought them for if they don’t approve of the deal that gets announced, and they’re given valuable stock options to keep either way. The main risk is that the sponsor cannot find an acquisition target.
Palihapitiya's success in telling his story emphasizes the critical importance of investor relations for SPACs and why it is imperative the boards and management deliver a transparent, timely and concise message to the investment community.
The credibility of the sponsor, the board, and the management team and their ability to source the best deals for their investors is paramount. Taking a page out of Palihapitiya’s book, companies must take a proactive approach to ensure investors understand the strategy and are aligned with the vision of the SPAC management team.
