[Editor’s note: Originally published on Go PropTech.]
First of all, it’s essential to understand the meaning of the term SPAC. SPAC is an abbreviation for a Special Purpose Acquisition Company. SPACs are publicly traded companies, and the purpose of their creation is to facilitate acquisitions and mergers with existing companies.
Although SPACs made an entry into the financial industry just a few years ago, there has been a meteoric rise in the SPAC investment vehicle. Among the primary reasons for this trend is that PropTech companies drive higher efficiencies in the real estate business, reduce friction, improve asset returns, and create greater transparency.
SPACs, also known as blank-check companies, are booming. According to a CNBC report, in 2020, 248 new SPACs were listed. That represents a four-fold increase, more than the 59 new companies created in 2019. In 2021, there are already 189 new SPACs that have been created to date. These figures reflect the growing popularity of SPACs.
Without any doubt, proptech startups are ideally positioned to be introduced to public markets. For many startups, the popularization of SPACs represents a unique opportunity to go public. In fact, in the last year, investors have invested over 83 billion dollars in blank-check companies.
PropTech startups including Fifth Wall, Soft Bank, and CBRE recently formed SPACs. SPACs raise money from investors, and once the company goes public, sponsors have to secure a merger within 24 months. Otherwise, the investors get their money back.
SPACs are already on the rise, but sponsors can take advantage of deals in this crowded marketplace. Moreover, in an environment with multiple SPACs, it isn’t easy to find merger partners at a reasonable price.
How SPACs Are Different from IPOs
SPACs have become popular in current market conditions for two reasons. The first is that they offer a quick path to public markets. The second is that they provide early access to retail investors. With SPACs, investors can expect higher returns without any significant downside. As a result, esteemed investors like Lance West, Scott Seligman, Brett White, and Howard Lutnick have recently opted to sponsor SPAC IPOs.
In today’s world, innovative technologies have disrupted the economic landscape in finance, real estate, healthcare, and genomics. If you’re looking for a secure way to find the returns you would typically only see in venture investment, SPACs might be a good option as they offer a lucrative ROI while limiting investor risk.
The innovative institutional structure of SPACs have allowed many forward-thinking companies to gain access to new streams of capital, with Aperture Acquisition Corp, BOA Acquisition Corp, CBRE Acquisition Holdings, and C&W Acquisition Corp all recently announcing SPAC IPOs.
Reasons Why PropTech SPACs Are On the Rise?
Undoubtedly, SPACs have gone mainstream, but people outside the investment community still don’t know much about them. SPACs are a perfect alternative to a traditional IPO, and they offer a viable alternative to private equity firms. Here are five reasons why SPACs are on the rise:
1. Access to Capital
Proptech startups can get access to capital without the debt service costs, covenant inherent in debt capital, and amortization. Moreover, SPACs provide permanent capital that helps management to focus on long-term value creation. It’s a different approach to private equity firms because you don’t have to contend with the risk of loss.
The real-estate market is capital intensive, and there is a win-win situation for both companies and SPAC sponsors.If the volume of SPACs increase as expected, investors will soon target smaller companies. This will afford advantages for shareholders because it will create options for greater liquidity.
2. Public Listing
Another reason why PropTech SPACs are on the rise is that they provide an easy path to public listing without pricing and market risks. Public equity companies offer non-cash currency for financing acquisitions and attractive compensation packages to employees.
We can expect lots of PropTech startups to go public much earlier than expected in 2021. By doing so, they will have a significant impact on the venture capital world.
3. No Unexpected Liabilities
SPACs haven’t conducted any material business and therefore have a clean balance sheet. Moreover, shareholders don’t face any liability even after the deal is closed.
According to some, they are the best way to make a company public, and many companies are turning to blank check models instead of the traditional IPO process. Many sponsors have raised their money by investing in SPACs. The main reason is that there are minimal, unexpected liabilities.
Moreover, companies can go public even during periods of higher volatility and market instability. SPACs offer significant downside protection. Therefore, there is always an opportunity to raise capital by using common shares instead of preferred shares.
If the investors don’t like the proposed acquisition of a SPAC, they can exercise redemption at any time. To many investors, SPAC offerings are preferable to an IPO.
4. Sponsor Expertise
Sponsor teams of SPACs are professional and experienced. They provide investors confidence and guidance throughout the SPAC process. A SPAC sponsor can be beneficial for improving the skills of the existing management team. When companies invest in SPACs, they don’t only raise money, but they also get a chance to train their key employees. The existing management team can learn new skills from sponsors and work more efficiently.
As SPACs have experts as operating executives, investors tend to favor teams working with SPACs. When companies invest in a SPAC business, they can get the help of these seasoned executives.
5. Flexible Control and Ownership
SPACs don’t necessarily replace the existing management team. That means a target company can undergo the entire SPAC process without changing ownership. Some investors feel that after investing in SPACs, they will lose control and ownership of the company, but that’s not the case. Instead, when a private company goes public, the control and ownership of the company can remain the same.
Due to the technological advancements in Real Estate, investors are taking more interest in PropTech SPACs. With multiple acquisitions and mergers in the PropTech space, the SPAC process in this sector is abundant.
Although it’s just the fifth month of 2021, we have seen a clear divide between those who have adopted PropTech trends and those left behind. SPACs have created a massive opportunity for investors in 2021. The benefits of SPACs have forced many industries, including real estate, to get involved.
According to The Real Deal, a large number of real estate players are focusing on Proptech due to the increasing amount of money flowing into blank check firms.
Real estate tech companies that ignore these trends will likely miss an exciting opportunity. PropTech is a rapidly evolving field, and when used in conjunction with the SPAC business process, there is a winning combination worthy of exploration.