SPACs Are Hot Because They Are the ‘Poor Man’s Private Equity Funds’

Retail investors who buy the shell-company shares get a shot at fast-growing startups before they go public.

SPACS—special purpose acquisition companies—are one of Wall Street’s hottest products. These publicly traded shell companies give tycoons and celebrities the capital to search for splashy one-shot deals.

In a 2016 paper, Lora Dimitrova of the University of Exeter Business School dubbed SPACs “the poor man’s private equity funds.” That’s because they give ordinary investors a way to participate in the purchase of a hot company before it goes public—a perk usually reserved for the wealthy.

It makes sense. The venture capital world is practically closed to “the poor man,” while fast-growing startups are staying private for longer. So individuals are turning to blank-check shell companies as their gateway to alternative investments.

Last year’s boom shows no signs of stopping. In the first two months of 2021, 188 SPACs went public, raising $60 billion and setting a pace to quickly surpass 2020’s record of $83 billion, data compiled by Bloomberg show. Blank-check companies are attracting more money than conventional initial public offerings.

Hedge funds are playing the field, but so are retail investors. These “poor men” account for about 40% of SPAC trading on BofA Securities Inc.’s trading platforms. This year, SPACs on average are rising more than 6% on their first day of trading, up from last year’s 1.6%, a sign of heavy retail participation.

SPACs typically have two years to find a target and close the deal, or they have to return money to investors, plus interest. They tend to spend at least three to five times the amount of cash they’ve raised. Using that formula, and with the average SPAC IPO generating $335 million last year, hundreds of blank-check companies would be searching for private firms valued at $1 billion or more.

SPACs have looked for value plays in fields such as energy, industrials, and finance. Now, most new SPACs are searching for targets in tech, health care, and consumer discretionary sectors. Electric-vehicle startups are a hot spot, with 26 EV makers, including Nikola Corp. and Luminar Technologies Inc., merging with SPACs last year, data provided by PitchBook Data Inc. show. Shares of Churchill Capital IV, a SPAC, soared when it proposed combining with Lucid Motors.

There are 10 SPACs seeking to buy cannabis startups, according to New Cannabis Ventures. Shares in Silver Spike Acquisition Corp. roughly doubled this year after finding a target in December. Gaming is another hot space: DraftKings, a sports betting operator, now trades at about $60 a share, more than a threefold increase from its April debut.

Retail investors want the next big exotic thing. Boring logistics or mortgage company deals won’t appeal to them. The billionaires launching SPACs will have to think outside the box.