PE for the Public: The Rise of SPACs

Abstract

A special purpose acquisition company (SPAC) allows sponsors to directly access public capital markets to raise funds to conduct acquisitions. Traditionally, such sponsors would raise capital by first tapping private markets to initiate a venture capital (VC) or private equity (PE) fund. We present a model that lends itself to an evaluation of the traditional PE-to-IPO approach and SPAC financing. PE-to-IPO financing more efficiently separates high-quality from low-quality sponsors. SPAC financing more efficiently separates good acquisitions from bad acquisitions and therefore is the preferred mode of funding for firms subject to severe adverse selection. According to our model, the recent rise of intangible assets and technology companies can explain the increased use of SPAC financing.