How to improve the design of SPACs to make them more aligned toward long-term value creation?

Details

Supervisors

Pouchain, Frédéric

Faculty

Louvain School of Management

Degree label

Master [120] : ingénieur de gestion, à finalité spécialisée

Abstract

Special Purpose Acquisition Companies (SPAC) have been one of Wall Street’s most sought-after types of investment in 2020/early 2021. These shell companies list very easily on the stock market and aim at taking private companies – usually late-stage start-ups that are not suited for a regular IPO - public by merging with them. The target company thus becomes public and replaces the SPAC on the stock market. In addition to having been fueled by favourable market conditions, SPACs have managed to attract tremendous interest thanks to the sky-high returns SPAC founders can generate from a successful business combination. On the flip side, many investors have been left in the cold with below-average returns. In this master’s thesis, my objective is to find out both from a macro and micro perspective what has driven the poor performance of SPACs and to evaluate the key measures that would make special purpose acquisition companies more aligned toward long-term value creation. In the literature review, after having comprehensively introduced the concept of SPACs, the point of view of academics on the problematic is widely discussed. The quantitative analysis focused on uncovering the company-specific micro-factors correlated to poor returns revealed that serial SPAC sponsors do not necessarily bring higher returns despite being associated with lower redemption rates. The qualitative section, documented by interviewing industry professionals complemented the academic view on the key measures the SPAC industry would benefit from. All these analyses led to the identification of three flagship measures that could prompt SPACs to be more aligned toward value-creation : (1) extend the lock-up period sponsors are subject to (period following the merger during which sponsors cannot trade their shares), (2) require enhanced disclosure about assumptions made about target companies’ forecasted financials, and (3) require more follow-up from the regulator after the merger. These measures would hopefully improve the design of SPACs without dampening the market.