SPACs and the future of new investment strategies

I work as an underwriter at Argo Pro, the professional liability business at specialty insurer Argo Group. This segment of Argo underwrites all types of business, my team, however, is focused on private equity and venture capital companies. Within our focus areas, we’re seeing the SPAC trend change how we underwrite risk and understand exposures. “SPAC” refers to a special purpose acquisition company, also known as blank-check company because it strictly exists to acquire another company then take it public.

Investor demand in SPACs appeared to peak in early 2021, when an average of 21 SPACs came to market each week with about $6 billion in capital. That amounted to a total of 93 deals worth $233 billion in the first quarter of 2021.

This year, only 24 SPAC mergers worth $28.3 billion have been announced so far.

So, are we nearing the end of the SPAC market? Possibly. But just because the SPAC wave isn’t as large as it once was, there will still be opportunities for asset managers and investors to utilize this strategy from time to time.

Why SPACs were a break from the norm

Traditionally, private equity investors would raise money in one giant fund then invest it in 100 different companies. That traditional type of fund is like a blind pool. Investors’ thinking is, “If we invest money in it, we’ll just get a check every quarter based on the total fund return, even if we have no idea where the funds are going.” With SPACs, investors raise money with a specific target in mind with the hopes to eventually cash out when the newly merged company eventually goes public.

The first concern: There’s a lot of debate about whether the whole SPAC market is even covered by insurance policies. Within our policy at Argo, similar to other companies in the industry, there needs to be an operating company to cover, whereas a SPAC-sponsored vehicle is just a blank check company looking for a target acquisition. Once the company does go public, it needs a completely different insurance program.

The SPAC trend is starting to dial back because there’s a finite number of private companies that are ready to go public and even fewer that have reached unicorn status with the potential to go public on their own. That brings up another concern: Some SPACs are on the hunt for any viable company to acquire because they risk forfeiting the capital they raised and paying back investors with interest if they don’t. The insurance market has, for the most part, agreed that SPACs aren’t considered a portfolio company because the sponsor vehicles do not actually have any tangible operations.

SPACs & the future of new investment strategies

If the SPAC trend does die down, something else will take its place. The private equity industry has enjoyed record levels of success in the past few years, so it’s just a matter of finding new places to invest their money.

For example, floundering businesses and falling commercial real estate prices present opportunities to purchase these assets at a discount and hold them until the market improves.

Whatever fortune awaits the SPAC market, the insurance industry should be ready to adjust policies to fit clients’ needs. Whether it’s a blind fund, SPAC or secondary fund to buy private company stock from former employees, policies can be tailored to meet whatever need. Given the fluidity of the market, the ability to amend the policy will be essential.

So, regardless of what happens with SPACs, the insurance industry has to rise up to meet the needs of its customers wherever they’re investing capital.

Scott Kelley is vice president of underwriting in Argo Group U.S.’s Financial Institutions practice with 15+ years of experience in the specialty insurance industry. He’s spent time as both an underwriter and broker, primarily focused on working with companies within the financial institutions industry.

Opinions expressed here are the author’s own.