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Phenomenal growth in special purpose acquisition company (SPAC) creates new opportunity for Insurers

Did you notice rise of SPAC last year while following stock market? There has been a phenomenal growth in SPAC: 510% growth in gross proceeds and 320% growth in IPO count from 2019. SPAC had gross proceeds of $83Bn (As of 31 Dec-2020) from $13.6 Bn in 2019 and IPO count of 248 in 2020 from 59 in 2019. This is not one-time growth in 2020 as if we look at the statistics, we see that it grew from $36 Mn in 2009 to whopping $83Bn in 2020. The SPACs are making its presence felt very much in wall street. Key SPAC stats explaining growth (Source: SPACInsider)

Year IPO Count Gross Proceeds (Mn) Avg IPO Size (Mn)
2020 248 83,020 334.8
2019 59 13,600 230.5
2018 46 10,752 233.7
2017 34 10,049 295.5
2016 13 3,499 269.2
2015 20 3,902 195.1
2014 12 1,750 145.8
2013 10 1,455 145.5
2012 9 491 54.5
2011 15 1,082 72.1
2010 7 503 71.8
2009 1 36 36

SPAC, in simpler terms, is a sort of process where investors pool their money first to acquire another company (which is not known at the time of pooling money). Later SPAC looks for company to acquire who wants to go public without engaging in the paperwork of a traditional IPO- for example started trading recently in Nasdaq after acquired by SPAC- PropTech Acquisition Corporation. Blade- a helicopter taxi company went public through SPAC. The reputation of SPAC was not very clear in the initial years where they were seen as a shady business. However, over the year things changed and SPAC went through some changes from investors’ safeguard perspective.

The rise of SPAC is creating a new opportunity for risk businesses. There are multiple risks for SPAC which needs to be managed carefully and professionally with the help of experts. Insurers and brokers with deeper understanding of life cycle risk of SPAC can be a strategic ally to navigate the life cycle phases.

Social inflation and higher risk of litigation makes it important to secure SPAC from liability lawsuits. For example, Nikola corp. in mid-2020 merged with SPAC (VectoIQ Acquisition Corp) to become a public listed company and in September 2020 a class action lawsuit was filed against Nikola and officers of VectoIQ for false claims and fraud.

I am just mentioning key risks here, but it is important to break up life cycle stages of SPAC and do risk analysis. Material misstatement and omissions are some of the key issues that might trigger lawsuits. D&O insurance must be negotiated well and it is possible when you know the issues related to SPAC and also the complete lifecycle risk associated with SPAC. Another key risk that is to be transferred is representations and warranties insurance (RWI). Now RWI has been and still the favorite of private equity players; but now sophisticated SPAC started understanding the benefits of RWI in their deals. There is currently definitely a gap in RWI for SPAC. Why I say there is a gap is because of some of the factors that is creating demand for RWI.

The first most important factor is the time pressure for SPAC to close the acquisitions in a limited time. RWI transfers the risk from buyers and sellers perspective which makes it less complicated and less risky. Also, adding RWI in the offering can give the competitive edge. Second most important factor is that now more money is being raised by SPAC unlike yester-years; so it reached a point where paying premium would create more value (strategic risk management) for SPAC-  indicating that now value created by RWI is more than the amount paid in premiums.  There is a significant gap in the SPAC domain which leaves key parties involved with lots of exposures. Cyber risk is another major area for SPAC where risk transfer is required due to key issues like IP security, stealing of other information etc. The competitions from private investors, VCs, LBO funds, large firms all makes it important for SPAC to work with strategic advisors to efficiently manage risk.

At this moment SPAC is not very well understood by insurers and brokers. It is important to understand the risks starting from IPO phase till Integration phase and help SPAC prepare understand the strategic risks involved in each phase. To capture the gap in the market now is the time to understand the capital structure of SPAC, understanding Strategic risk, operational risk, and financial risks involved in each stage.

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