Juan José Cervantes
Managing Partner
Trebol Capital
Startup Contributor

Is a SPAC a Good Investment Opportunity for Mexican Investors?

By Juan José Cervantes Mena | Mon, 04/26/2021 - 09:00

The SPAC acronym stands for Special Purpose Acquisition Company and refers to a company created for the exclusive purpose of raising capital in public markets (on the stock exchange) through an Initial Public Offering (IPO) and later merging with a private company and making it public. It is a model that has experienced tremendous growth since last year.

SPACs, also known as “blank check” companies, have been around for decades. In the past, they had a bad reputation for scamming investors. However, the Securities and Exchange Commission (SEC) started regulating SPACs in an attempt to reduce fraud. The regulation granted investors the right to redeem units before an acquisition.

While SPACs remained relatively unpopular for years, the number of IPOs has gone from one in 2009 to 248 in 2020, when they raised about US$83 billion. So far this year, there are 298 SPACs with about US$97 billion.

Different Mexican companies, like DD3 Capital Partners, are working with this vehicle. Recently, DD3 created DD3 Acquisition III, their third blank-check company. It was filed with the SEC to raise up to US$150 million in an IPO.

From my point of view, a successful case is that which DD3 did with Betterware. DD3 Acquisition went public in October 2018 and completed its merger agreement in March 2020 with Betterware de Mexico S.A. de C.V., the leading direct-to-consumer sales company in Mexico, focused on the home organization and solutions segment. It became the first Mexican company directly listed on the NASDAQ stock market, under the ticker symbol "BWMX.” As of April 13, 2021, the stock was trading around US$39.01, and considering that the initial purchase price per unit in a SPAC is usually $10.00 this is a 300+ percent return.

Other SPACs targeting Mexico and Latin America include Excelsa Acquisition, a blank-check company formed by the founder of Intercorp Perú that is looking to raise up to US$250 million, and DILA Capital Acquisition, a blank-check company formed by DILA Capital targeting tech-enabled sectors in Latin America, which filed to raise up to US$50 million.

Excelsa Acquisition plans to target industries that service and capitalize on the favorable structural and secular trends related to the emerging middle class across Latin America, including financial services, healthcare, retail, education, entertainment, and consumer goods-related industrials, which the company refers to as "Latin America Growth Industries."

DILA Capital Acquisition intends to focus on companies operating in select, fast-growing, technology-enabled sectors that are disrupting traditional markets in Latin America.

The Magic of SPAC

Remember that a SPAC is a shell or blank-check company at the time of the IPO, since it does not have any type of business operation or assets. SPACs rely on the experience and track record of the management team, who should have enough knowledge and networking to find an attractive acquisition target and to complete the acquisition through a business combination that could be a merger or shares purchase.

Usually, the time frame for a SPAC to make an acquisition is 24 months; however, with a shareholder vote this can be extended to 36 months. So, it is a relatively quick investment vehicle to execute.

All proceeds from the IPO are held in a trust account until a private company is identified as an acquisition target. The trust account typically invests in money market funds or short-term US government securities. If an acquisition isn't made, the SPAC is dissolved, and, in most cases, investors will be entitled to an amount of the total trust proportional to the number of shares they own.

SPACs can be lucrative for sponsors as they are paid by the success of the SPAC through share ownership called “the promote.” The promote allows sponsors to buy 20 percent of the outstanding shares at a heavily discounted price. With that being said, sponsors don't get paid unless the SPAC performs well and they cannot “run” after the business acquisition because there is a lock-up period. As a result, they're incentivized to maximize the acquisition.

SPACs allow a private company to go public in a faster manner than through the traditional IPO process. From the beginning, SPAC units trade like stocks, and investors can buy or sell shares in the current market, so their investment will rise and fall with the share price of the company.

Determining Whether to Invest in a SPAC

The first determining factor is the management team or sponsors.

Because there's no company to start with, no assets, no product, and no track record, investors are betting on management. Investors may want to evaluate the SPAC's management team to better understand its expertise, experience, and personal track record. Often, the SPAC might be led by a celebrity like Shaquille O´Neal or a notable person in the investment world, such as Bill Ackman, but like any investment, it is important to know who you are trusting your money with.

Investors who invest directly with a management team to create a SPAC purchase shares for a lower price per share while regular shareholders purchase shares at $10, which is the typical initial price of the IPO.

Second, if you are interested in a particular SPAC, you should spend time reviewing and reading carefully the terms of the investment, as well as the periodic and current reports filed with the SEC.

Once the target company is identified, investors need to decide if it's a good investment, and quality research from investors, underwriters, and regulators can be helpful in discarding some prospects that are found to have irregularities related to the company and its management.

The SPAC provides shareholders with an official statement about the proposed business combination, including plans, historical financial statements and corporate governance matters. Examining this information is an essential part of determining if the deal is acceptable because a target company just may not be public-ready due to lack of adequate internal controls or SEC-required financial statements.

Finally, as with any investment, investors should weigh the opportunity costs and the level of risk involved.

Understanding the performance of SPACs can help, despite some SPACs having been very successful, there are big concerns and questions about their performance and a depreciation in value following the completion of the business combination.

In the end, SPACs have both detractors and fans, but they represent an interesting option to diversify an investment portfolio. The more informed and prepared Mexican investors and companies are, the more opportunity they will have to take advantage of this investment model, either for Mexican or foreign companies.

Photo by:   Juan José Cervantes