How the rise of SPAC's can rocket fuel India's tech companies

SPAC’s are essentially an investment structure formed by sponsors with the sole purpose of raising funds to acquire another company. Also known as ‘blank check companies’, SPAC’s carry no operating history and raise capital via an IPO without identifying a target acquisition. Large institutional investors are instead enticed by the acquisition strategy and management team’s expertise in a certain business or industry. Regulations outline that if an acquisition cannot be completed within two years, the SPAC must return the funds to the investor.

Once the target is identified, the proposed acquisition is required to be approved by the SPAC investors. In the event that it is rejected, investors are able to redeem 100 percent of their shares; otherwise, the SPAC and the target business combine into a publicly-traded operating company (“De-SPAC transaction”). SPACs, therefore, provide investors an entry ticket to a future deal or an option to walk away after one has been tabled.

In July, Private Equity mogul Bill Ackman raised a record $4 billion for a SPAC, enough to let him reportedly approach Airbnb about a merger. Despite this not progressing, the notion of a SPAC swallowing a company of that size is significant. Successful acquisitions, however, have more typically centered around high-growth companies with disruptive technologies and big potential, even if at a pre-revenue stage. Examples include Virgin Galactic and electric automakers like Fisker even though they are yet to have any cars available for sale. The process for sponsors can be hugely lucrative with an industry average return of 20 percent of the SPAC’s founder shares for their part. This would involve managing the selection, raising funds from institutional investors, overseeing the acquisition process, and coordinating the regulatory and legal approvals. These returns dwarf any total expense in setting up the structure.