Special Purpose Acquisition Companies (SPACs) are publicly traded funds that are created with the intent of acquiring other companies. SPACs typically begin with an IPO in which capital is raised to be used for the acquisitions. Although it can vary, management running the SPAC typically has 18-24 months in which they can propose acquisition targets. The interesting twist is that shareholders in the SPAC have the ability to approve or reject the acquisitions. If shareholders reject the acquistions, the SPAC is dissolved and money is returned to the investors.
A key component of a SPAC is the team of management principals that run the fund. These principals take on risk (startup and issuance costs are eaten by the principals if the SPAC gets dissolved), but with huge potential reward. If an acquisition target is successfully approved, the principals retain 20% of the company.
Hedge funds are common SPAC investors, as the option value of investing in the SPAC from the beginning is high because the investors have approval rights on proposed acquisitions.
According to Dealogic, in 2007, 66 SPACs went public, raising $12B.
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