Investors caught up in the frenzy of the stock market's wild rebound this year have a new favourite spot for their money: pools of cash that hunt for acquisitions. Some will pocket huge gains and others will be saddled with deep losses from these so-called 'blank cheque' companies, but one group - Wall Street's top banks - is coming out a winner.
Three of them - Citigroup, Credit Suisse, and Goldman Sachs - now account for nearly half of underwriting revenue, meaning they stand to generate, according to Dealogic, at least $400m (€340m) in fees from blank cheque companies that have listed this year. That's a record amount of cash from a market that at one time barely generated anything for the largest firms.
It's a mania that's rising as each month goes by: the second quarter saw two dozen SPACs, as the special purpose acquisition companies are known, come to market and raise $8bn, double the previous record set in the first quarter, according to Dealogic. Last week Bill Ackman raised $4bn for his own vehicle and Billy Beane, the baseball executive featured in "Moneyball," has filed for a $500m vehicle.
The ever-bigger deals, as well as increased interest from traditional banking clients such as private equity and hedge fund firms, has attracted Wall Street's attention. The large amounts of money to be made arranging the transactions haven't hurt, either.
"They tend to be very fee-intensive deals," said Michael Heinz, a partner at law firm Sidley Austin who advises sponsors and investment banks on SPACs.
"Between the front-end and back-end, it is very lucrative for banks."
It's a notable transformation for SPACs, which were once an obscure part of the market tainted by association with penny-stock scandals. A decade ago, with the exception of Citigroup and Deutsche Bank, underwriters were smaller investment banks. Five years ago, Goldman Sachs was absent from the league tables - now it's among the biggest players.
The products' popularity has been pushed by yield-hungry investors, who see SPACs as safe bets that could offer better returns than Treasuries. The money earns interest until a deal is struck. If a manager can't find a deal in a certain time or investors don't like the planned merger, they can get their money back. If a merger is successful, then investors can share in those gains.
Banks typically take a 2pc cut of money raised from selling shares in a public listing. Once a SPAC completes a merger, the firms are then given 3.5pc of IPO proceeds. SPACs account for nearly 40pc of the IPO market this year up from just 1.1pc a decade ago, according to Dealogic data.
Interest remains high even with the recent surge. Investors are paying premiums for shares well before they know about deals, and startups with no sales or products are seeing their share prices skyrocket. More than 70pc of the 96 SPACs looking for a deal are trading at a premium, an unprecedented number, according to data from SPAC Analytics.
Apollo Global Management-backed Spartan Energy Acquisition saw its shares soar 54pc in anticipation of a deal with Fisker, a battery-powered car venture that has no product in the market.
That kind of performance explains worries that the market has become too speculative, and that there won't be enough deals to ensure broad success. For now, though, bank executives are confident in their future.
"There are great private companies that are under stress because of Covid that markets believe will be long-term winners," said Tyler Dickson, global co-head of banking, capital markets and advisory at Citigroup. "That's a match made perfect for a SPAC when factoring in volatility in the IPO market and the current slowdown in M&A."