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How SPACs became the new investment craze that’s sweeping Wall Street

What does Joanna Coles, a former women’s magazine editor, have in common with US sports stars Alex Rodriguez (A-Rod) and Shaquille O’Neal, tycoon Sir Richard Branson and Martin Luther King III?

The answer, as those who keep up with the latest craze on Wall Street will know, is that they are all aficionados of the SPAC – a Special Purpose Acquisition Company.

So what are SPACs, exactly? And are they worth the hype, or just another market fad that will come to grief?

Follower of fashion: Top journalist turned astute entrepreneur Joanna Coles has teamed up with Jonathan Ledecky to form a SPAC named Northern Star Investment Corp II

Coles, 58, once editor-in-chief of Cosmopolitan, has made a big name for herself as an astute entrepreneur and investor. The married mother-of-two is a special adviser to investment firm Cornell Capital, and sits on the board of messaging app Snapchat’s owner.

She has teamed up with Jonathan Ledecky, the co-owner of the New York Islanders ice hockey team, to form a SPAC named Northern Star Investment Corp II. 

It is snapping up a financial technology firm called Apex Clearing in a $4.7billion (£3.3billion) deal.

Apex, which is expected to begin trading on the New York stock market in three to four months, provides backroom services to the likes of Goldman Sachs’ Marcus and to online investment platforms. 

It is one of the winners behind the boom in amateur share trading during the pandemic, its technology providing the ‘plumbing’ for 200 firms, serving 13m customers.

Coles is not alone in embracing SPACs, also known as ‘blank cheque companies’. It may be an ugly acronym, but investors believe the returns can be very handsome. Now, almost everyone who is anyone in US finance, media, politics and sport seems to be joining in the fun.

Only hours after the Northern Star announcement, it emerged that Californian electric vehicle company Lucid Motors is set for a $24billion (£17billion) stock market listing in the biggest-ever SPAC deal, despite the fact it is not yet producing cars.

According to The Economist, around 250 SPACs were launched last year in the US, raising $83billion (£58.8billion). 

Trend setter: Sir Richard Branson can lay claim to having sparked off the SPAC trend when his Virgin Galactic was listed on the New York Stock Exchange via a SPAC in 2019.

Trend setter: Sir Richard Branson can lay claim to having sparked off the SPAC trend when his Virgin Galactic was listed on the New York Stock Exchange via a SPAC in 2019.

Data from SPAC Research found that 144 of them have raised just under $46billion (£32.6billion) this year so far.

Blank cheque companies are pure acquisition vehicles. Unlike conventional companies, they do not have a business of their own, but simply a stash of capital to buy or merge with another firm, then list it on a market.

Some have specific companies in mind, others are on the hunt. Once a SPAC is launched, it has two years to find a target to buy, or it will be wound up with money returned to its backers.

If it does do a deal, then its investors share in the gains – or losses.

The big attraction from a target company viewpoint is that they are a way to swerve fuss, bother and expense for entrepreneurs who want to list shares on the stock market, avoiding a full Initial Public Offering (IPO).

Many business founders baulk at an IPO because it means opening their books to investors, having to jump through numerous regulatory hoops and signing up to a timetable that can stretch over many months.

A SPAC is a much quicker route to market – though some suspect it could be used as a way to cut corners. 

And there are clear risks to putting money into one without knowing exactly what it will do with their cash – though investors can vote down deals they dislike.

Sceptics fear that SPACs are another symptom of market madness, and that the unwary will get their fingers burned.

Investment manager Justin Urquhart Stewart cites the famous South Sea Bubble-era scam of ‘a company for carrying an undertaking of great advantage, but nobody to know what it is’ and warns investors to steer clear. ‘You have no idea where your money is going,’ he says.

Big hitter: Slam Corp, a SPAC formed by former baseball player A-Rod (pictured), has $500m (£354million) to target sports, media and entertainment businesses

Big hitter: Slam Corp, a SPAC formed by former baseball player A-Rod (pictured), has $500m (£354million) to target sports, media and entertainment businesses

Readers who recall the 1980s will by now be thinking that SPACs sound awfully similar to shell companies, some of which were notorious for scamming unwary investors. 

In fairness, others turned into titans, the most famous of which is Sir Martin Sorrell’s WPP advertising group, created out of a shell called Wire & Plastic Products.

Fans of today’s versions insist that this time it’s different.

Such fears have not deterred supporters of Slam Corp, a SPAC formed by former baseball player A-Rod, an ex-boyfriend of Madonna’s. It has $500million (£354million) to target sports, media and entertainment businesses.

Nor did they put off Austin Russell, a 25-year-old college dropout. He became the world’s youngest self-made billionaire last year after his firm, Luminar Technologies, listed on the US Nasdaq market via a SPAC.

Basketball star Shaquille O’Neal and Martin Luther King III – one of the sons of the famous civil rights campaigner – are involved in a SPAC called Forest Road, which raised £212million to invest in media, tech or telecoms. 

British businessman Sir Richard Branson can lay claim to having sparked off the trend when his Virgin Galactic was listed on the New York Stock Exchange via a SPAC in 2019.

So far they remain largely a US phenomenon and have yet to make serious inroads in the UK. The London Stock Exchange is understood to be considering adjusting its rules to encourage more SPACs to float.

It is right to be cautious. It may be unfair to compare them to the scams of yesteryear, but SPACs are still risky.

If they take off here, British small investors should think long and hard before jumping aboard the bandwagon.

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