Blank Check Companies a Boon for Big Banks

Underwriting SPACs Help Big Banks Weather Pandemic Circumstances

A record-breaking amount of blank check companies have been created recently as startups in the electric vehicle, cannabis, and technology spaces rush to capitalize on investor enthusiasm. While the SPAC industry used to be dominated by a small group of firms, large banks vied for dominance in the sphere in 2020, including Credit Suisse (CS), Citigroup (C), Goldman Sachs (GS), Morgan Stanley (MS), JPMorgan Chase (JPM), and Bank of America (BAC). The interest from some of Wall Street’s largest banks signals just how lucrative underwriting blank check companies has become.

Analysts say big banks are using blank check underwriting to stay profitable as interest rates remain low and economic sluggishness has forced them to put billions of dollars aside for potential loan losses. Typically, banks help SPACs find buyers for shares and backstop the company’s stock price. The banks are then able to charge fees—typically 2% of the money raised in the IPO and 3.5% when the merger is complete. While traditional IPOs can sometimes be more lucrative for banks, SPAC deals also bring the possibility of advising fees.

How Does an SPAC Work?

Blank check companies, also known as special-purpose acquisition companies, or SPACs, are public firms. They launch an initial public offering, or an IPO, and then use money from that IPO to merge with another company.

Usually, that merger happens within the first few years of the company’s existence. The merged company then gets to assume the SPAC’s position on a stock exchange. That way, hot startups in industries like electric vehicles and cannabis can access public markets through their SPACs. Individual investors can buy stock in most SPACs.

SPACs Raised $82 Billion in 2020

Blank check companies listed in the United States raised $82 billion last year. For comparison, that is more than six times what blank check companies raised in 2019. Analysts say it is also more than the total amount SPACs have ever raised in the past.

William Ackman’s Pershing Square Tontine Holdings (PSTH), which raised $4 billion in July 2020, was the largest blank check IPO to date. Firms Citigroup, UBS Group AG (UBS), and Jefferies Financial Group (JEF) were the lead underwriters on the deal. Banks as well as individual investors will be eager to see if the rise of SPACs continues in 2021.

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