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SPACs first entered the financial industry just a few years ago.
Yet, the SPAC investment vehicle has become increasingly popular – especially in PropTech.
PropTech companies increase efficacy, reduce friction, improve asset returns, and create greater transparency – all of which make PropTech attractive for SPACs.
Before diving deeper into why PropTech SPACs are on the rise, let’s take a look at what exactly SPACs are.
SPAC stands for Special Purpose Acquisition Company. SPACs are publicly traded companies that facilitate acquisitions and mergers with existing companies.
SPACs are also known as blank-check companies. And, they’re booming. According to a CNBC report, in 2020, 248 new SPACs were listed. That is 4x as many companies created in 2019 - only 59. In 2021, 189 new SPACs have been created to date. And, in the last year, investors have invested over 83 billion dollars in blank-check companies.
For many startups, the popularization of SPACs represents a unique opportunity to go public. SPACs raise money from investors. Then, once the company goes public, sponsors have to secure a merger within 24 months. Otherwise, the investors get their money back.
PropTech investors including Fifth Wall, Soft Bank, and CBRE recently formed SPACs. Because SPACs are on the rise, it’s a crowded market – which can be a good thing for investors. For startups, unfortunately, this means it’s hard to find merger partners at a reasonable price.
SPACs are a good alternative to a traditional IPO. And, they offer a viable alternative to private equity firms.
SPACs owe their popularity in part due to offering a quick path to public markets. They are also popular because they provide early access to retail investors. This is because, with SPACs, investors can expect higher returns without any significant downside. As a result, investors like Lance West, Scott Seligman, Brett White, and Howard Lutnick have recently sponsored SPAC IPOs.
Innovative tech has shaken up industries like finance, real estate, healthcare, and genomics. For a secure way to get venture capital-like returns, SPACs might be a good option because they offer high ROI while limiting risk.
The innovative institutional structure of SPACs has helped many forward-thinking companies access new streams of capital. Aperture Acquisition Corp, BOA Acquisition Corp, CBRE Acquisition Holdings, and C&W Acquisition Corp all recently announcing SPAC IPOs.
Now that you know some background on SPACs, here are five reasons why SPACs are on the rise:
PropTech startups can access 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 than private equity firms because there’s little risk for loss.
Because the real estate market is capital intensive, and it’s a win-win situation for both companies and SPAC sponsors.
And, if SPACs continue to be popular, investors will soon target smaller companies. This will afford advantages for shareholders because of options for greater liquidity.
Another reason why PropTech SPACs are on the rise is they provide an easy path to public listing – without pricing and market risks. Because of SPACs, more PropTech startups will go public in 2021 than expected.
SPACs have a clean balance sheet because they haven’t conducted material business. And, shareholders don’t face any liability even after the deal is closed.
Because of minimal unexpected liabilities, many companies are turning to SPACs instead of traditional IPOs. And, sponsors are raising money by investing in these same blank check companies.
Plus, companies can go public even during periods of higher volatility and market instability. SPACs offer downside protection. As such, there’s always the opportunity to raise capital by using common shares instead of preferred shares. And, if investors don’t like the proposed acquisition of a SPAC, they can exercise redemption at any time.
Sponsor teams of SPACs are professional and experienced, increasing investor guidance. And, sponsors also provide guidance throughout the SPAC process. When companies invest in SPACs, they don’t just raise money. These companies also get a chance to train their key employees. As such, the existing management team can learn from sponsors to improve efficiency.
Because SPACs have experts as operating executives, investors also prefer teams working with SPACs.
SPACs don’t have to replace the existing management team. So, companies can go through the SPAC process without changing ownership. Investors won’t lose control or ownership of the company during this process, which is important to some investors.
Investors are taking more interest in PropTech SPACs, as evident by multiple acquisitions and mergers.
SPACs have created a massive opportunity for investors in 2021. The benefits of SPACs have led many industries, including real estate technology, to adopt this investment vehicle.
According to The Real Deal, a large number of real estate players are focusing on PropTech due to the increased capital flowing into blank check firms.
Real estate tech companies that ignore these trends will miss out on an important growth 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.