The uneasy partnership between private equity and SPACs

THE SPECTACLESPACIPOIPOSPACSPACPESPACSPAC of the , or “special-purpose acquisition company”, has preoccupied bankers on Wall Street over the past year. This is in part because the vehicles, which list a shell company on stockmarkets and raise a pot of capital before hunting for a private company to merge with, are often touted by their backers as an alternative to an initial public offering (). Big banks make meaty fees from their businesses. For some, the fact that s have muscled in is an unwelcome development. As voracious buyers of private firms, though, s are attracting as much attention among the private-equity () barons on New York’s Park Avenue as on Wall Street.Since the start of 2020 s have gobbled up almost $200bn in capital. The way they are constructed makes them prone to overpaying for firms. Creators see no compensation unless they strike a deal with a merger target, which must often be done within two years. The founders’ payoff is usually 20% of the shares the helps issue in the newly public firm, which are given to them for a nominal fee. This means that even if the shares plunge after the shell company merges with its target, the founders are still well compensated. Their incentive is thus to do any deal they can, at lofty prices if necessary.