4 minute read 15 Sep 2020
EY - Businessman working

Why investors see growing opportunity with SPAC mergers

By EY Americas

Multidisciplinary professional services organization

4 minute read 15 Sep 2020

Special purpose acquisition companies (SPACs) provide a streamlined pathway to take private companies public.

In brief

  • SPACs can be an effective tool for institutional investors and private equity firms to participate in acquiring private companies with potential.
  • SPACs go public with an initial public offering and then merge with a private company, which takes on the public listing.
  • Both investors and private company owners have become more open to SPAC transactions, with deals growing in both number and size.

More than ever, institutional investors and private equity firms are using a long-overlooked tool for acquiring private companies — and taking them public.

Special purpose acquisition companies (SPACs) are formed to raise capital with the sole purpose of acquiring one or more unspecified private companies after going public. SPACs aren’t operational — they essentially serve as a temporary cashbox used to identify a merger target and facilitate its access to public markets.

SPACs have been around for years. But in the past, they were often seen as a “last resort” for private companies without better options for going public.

That’s no longer the case. Today, SPACs are rapidly growing in popularity, and an increasing number of high-profile investors and firms are forming them to put capital to use. In 2010, just two SPACs underwent an initial public offering (IPO). In 2019, 59 SPACs completed an IPO.

As of July 2020, there were 100 SPACs seeking acquisitions with more than $30 billion in equity held in trust. Since 2019, 41 SPAC mergers have been completed and another 24 have been announced.

As the number and profile of SPACs have grown, so too have the available targets, in industries as diverse as electric vehicles, financial technology and health care.

SPACs and investors: how they work together

The SPAC’s founder serves as its sponsor, working with advisors to handle the groundwork for an IPO. In some cases, the sponsor also secures additional funding commitments in connection with the IPO.

One of the biggest advantages for SPAC sponsors is that the IPO process is relatively simple. Because SPACs have a straight-forward, easy to understand business purpose, most can complete their paperwork within three months with little back and forth with the SEC.

Once the IPO is completed, the SPAC can begin evaluating and approaching potential merger targets. When a suitable partner is found, and an agreement is reached and approved by shareholders, the transaction closes and the target company survives as the publicly listed entity.

SPACs provide significant benefits, including:

  • Access to high-quality sponsors without a management fee
  • Private-equity–like investment opportunities
  • Capital protection in the form of redemption rights
  • Additional upside through warrants
  • Bounded investment horizon — SPACs generally have 18-24 months to complete an acquisition

Transactions evolve as popularity grows

The parameters of many SPAC transactions have evolved as the process has grown in number and popularity. For example, SPACs often involve larger deal sizes, which increases the pool of potential acquisition candidates. The average SPAC IPO has grown to nearly $400 million in 2020, up from approximately $50 million in 2010, and some have raised as much as $1 billion or more.1

In addition, SPACs today receive far more additional capital in the form of forward purchase commitments and credit lines. This backstop funding is used to cover SPAC shareholder redemptions and provide cash to both pre-merger owners and the post-merger company.

Finally, we are seeing a significant reduction in warrant coverage in recent months, reflecting greater confidence from investors that a successful merger can be completed. Warrants have long been included in the SPAC units sold at IPOs as an inducement to attract investors, but they can be highly dilutive for companies whose share prices perform after the merger. 

SPACs: a popular alternative path to the public markets

Listen to a replay of our recent webcast to learn more about the latest trends impacting this rise in SPAC transactions.

Watch on-demand


SPACs continue to gain in momentum. In the coming months it’s likely we will see continued growth in the number and size of SPAC IPOs, as well as increasing numbers of high-profile mergers.

About this article

By EY Americas

Multidisciplinary professional services organization