"The biggest advantage of investing in SPACs (special purpose acquisition companies) is that you can hold a corporation's stock early, even before it lists. The cheaper you buy a stock, the higher the return. The way to buy a stock at the cheapest price is to buy it the earliest. Because there is a tool called a SPAC, ordinary investors can invest early in unlisted corporations that are scheduled to go public."
Professor Kim Hak-ju of Handong Global University's School of ICT Entrepreneurship said this in a recent interview. In fact, according to a study by the Free University of Bozen-Bolzano in Italy that examined a total of 236 SPACs in the United States that completed mergers with unlisted corporations from 2012 to 2021, SPACs recorded a high short-term return of "7.4% over five days" around the time of the merger announcement, but their long-term returns were sluggish afterward. The average return for one year after the merger announcement was -14.1%, and the average return for two years was -18.0%. That is why the advice to "buy early" is recommended.
Kim is an investment expert who served as head of research at Samsung Securities, chief investment officer (CIO) overseeing investments at Woori Asset Management, and CIO at Hangaram Investment Advisors. The following is a Q&A.
SPACs are drawing attention again in the U.S. stock market.
"After the SPAC boom of 2020–2021, liquidity shrank and a sorting of the wheat from the chaff took place, leading to a slump in SPACs in the U.S. market for a while. There are three reasons they are drawing attention again recently. First, as interest rates fall, there is a momentum of abundant liquidity. Second, liquidity is flowing into new technologies. The United States has many capable corporations with new technology, and they are choosing SPACs, which allow faster listings and capital raising than traditional initial public offerings (IPOs). Lastly, the SPAC market has shifted from being sponsor-oriented to investor-oriented. During the boom, popularity was so great that an excessively supplier-dominant market unfolded. In the United States, when sponsors set up a SPAC, they typically contribute only $25,000 (about 34.85 million won) and acquire 20% equity of the SPAC entity. They also receive warrants that allow them to purchase new shares of the corporation after the merger. The terms were too favorable to sponsors, but after the perception spread that "SPACs do not automatically make money," the SPAC market changed to a more investor-friendly environment."
Recently in Korea, Meritz Securities drew attention by listing a new SPAC for the first time in 15 years.
"In Korea, a limitation is that there are few capable startups that can use SPACs for backdoor listings. Corporations that steadily generate operating profit and have good cash flow can go with a traditional IPO. SPACs are chosen by corporations with new technology that want to grow quickly even if their sales and operating profit are not strong yet, but in Korea, few capable startups are born. Korea excels in engineering fields that tweak technology to create new added value, but it is weak in basic science that directly leads to new technology. There are also few investors with the discernment to find good corporations."
Examples of successful SPAC backdoor listings.
"When it is difficult to generate operating profit immediately but you want to raise funds by earning trust from prominent investors, the advantages of listing via a SPAC emerge. For example, QuantumScape, a solid-state battery developer, completed a backdoor listing on the New York Stock Exchange (NYSE) via a SPAC in Sept. 2020. Also, iRocket, a New York–based reusable rocket developer, announced in Jul. that it would complete a backdoor listing on the Nasdaq via a SPAC. The stock market is ultimately a place where expectations are bought and sold. As artificial intelligence (AI) moves beyond the training stage into the inference stage, it requires massive power, and existing liquid-electrolyte batteries have safety limits, so we must eventually transition to solid-state batteries. Low Earth orbit (LEO) satellites can create strong synergies with sixth-generation (6G) mobile communications technology, and there is strong demand in the defense sector. Corporations with new technologies that can change the world need to list via SPACs to succeed."
The advantages of SPACs from an investment perspective.
"The biggest advantage of SPAC investing is that you can hold a corporation's stock early, even before it lists. The cheaper you buy a stock, the higher the return. The way to buy a stock at the cheapest price is to buy it the earliest. Because there is a tool called a SPAC, ordinary investors can invest early in unlisted corporations that are scheduled to go public.
Also, in the case of U.S. SPACs, if you buy a SPAC early, you receive additional warrants that can be exercised after the merger. Structures that grant one-half of a warrant per one common share, or one-third of a warrant per one common share, are common. For example, if a SPAC grants one-half of a warrant per one common share, buying 10 shares is the same as effectively buying 15 shares. Even if a SPAC fails to merge with an unlisted corporation, it has a redemption request right that lets you get your principal back."
How can investors separate the wheat from the chaff with SPACs?
"You should first look at the sponsor's past performance in managing SPACs. Whether a SPAC succeeds depends on the sponsor's capabilities and past record. Put simply, it's "how quickly they can bring in competitive corporations."
In addition to the ability to find good corporations, the "ability to raise funds to fill funding gaps" is also important. SPAC investors have the right to get their principal and interest back if the merger does not go through, and if market conditions are poor or the target corporation is deemed unattractive, investors will request redemption. The more redemption requests there are, the more the public offering funds originally raised by the SPAC shrink, leaving less money to acquire a corporation when pursuing a merger. Therefore, to fill the money that left through redemption, sponsors often use structures that attract additional private equity. Sponsors must have strong networks on both sides—with innovative corporations and with private equity.
The sponsor's attitude and philosophy matter as much as network and management capability. Some sponsors focus on dazzling investors with flashy items or set compensation that is excessively favorable to the sponsor. You need to assess whether the sponsor is conscientious and whether they designed SPAC terms favorable to investors."
When is the right time to buy a SPAC?
"First, I recommend buying right after the SPAC lists. That is when the price is lowest, and you can receive additional options such as warrants at a low price. After a merger is announced, you can consider additional purchases based on the capabilities of the corporation that agreed to merge. At that time, a hint is the price at which the private equity that came in to fill funds drained by redemption buys SPAC shares. If the private equity bought SPAC shares with a premium, that is a good signal that you can follow and add more. Buying after the merger is completed is the same as buying a regular stock, so it defeats the point of investing in SPACs."