In contrast, SPACs in the U.S. are firmly established in the local stock market, accounting for approximately 50 percent of all IPOs in 2020, even though the number declined in the second quarter and critics are warning of a saturation of the SPAC market.
Information about the founders is important. Although European investors find SPACs attractive, the concept and approach have not yet gained widespread acceptance. While traditional IPOs involve “real” companies, SPACs are initially vehicles for raising capital. Behind them is often a well-known investor who wants to make a name for themselves in a specific industry or market—but with a company that does not (yet) exist. Potential investors are therefore not choosing a familiar business model, but rather investing in the idea, the plans, and the investors’ ability to successfully execute them.
After all, they have the option to exit the transaction if the business seems uncertain or unlikely to succeed. SPACs can be described as “turbochargers for IPOs.” While the traditional route takes about a year, the process is shortened to about three months with SPACs. Investors need information about the founders and must determine which sector they want to invest in.
This makes the initiators’ expertise and network all the more crucial, as they enable the identification of the right target company. This is precisely what investors rely on. As a result, dealing with SPACs is always speculative and also risky. Banks and investment firms are not as aware of this as retail investors, who can participate in private equity and venture capital strategies through SPACs. This approach is traditionally reserved for institutional investors.
Nevertheless, caution is advised: Unlike with Siemens stock, for example, you’re buying a pig in a poke—or rather, it’s completely unclear whether there’s even a pig in the poke at all, i.e., which company you’re investing in. Furthermore, because SPACs are not subject to the same regulatory scrutiny that “normal” IPOs must undergo, they are potentially more vulnerable to fraud.
SPACs Are Attractive for Small and Medium-Sized Businesses
Nevertheless, SPACs are capable of much more than is generally assumed: They can serve as a vehicle for financing small and medium-sized enterprises, they can offer startups an alternative to venture capital, they can operate on a scale of tens of millions, and they are compatible with German structures. However, this raises a number of legal questions. For example, there is debate over whether German corporate law is too hostile toward SPACs and whether reform is needed in the short term to remain competitive.
In addition, German structures may offer greater certainty, particularly when it comes to business succession in the SME sector. In the current low-interest-rate environment and given a very active M&A market, SPACs are an interesting option for both companies seeking an IPO and those looking to sell their businesses.
It remains to be seen how they can become an established financing option alongside other alternative instruments, such as private equity, private debt, SME bonds, or synthetic structures.
The question is whether the German stock market, with its rather cautious investment behavior, is suitable for SPACs. It is therefore possible that German investors will remain skeptical. On the other hand, there is currently a lack of attractive investment opportunities. We’ll have to wait and see!
