By Lee Sherman
If you’ve been following investing trends you’ve probably heard of Special Purpose Acquisition Companies (SPACS). But, for most individual investors, they remain shrouded in mystery, perhaps intentionally so.
SPACs are sometimes referred to as shell companies since they don’t have any commercial operations but in fact the special purpose referred to in the name is “to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company,” according to Investopedia. For many investors, SPACs are a get-rich-quick scheme since they only have a two-year lifespan in which to find an existing private company to merge with and bring public.
My colleague, Thomas Kostigen sheds some light on how they came about and offers some insights into their current popularity, he points out they’ve been around long enough now (since the 1980s) that, despite the fact that they are built around a future payoff, rather than an expectation of immediate and regular occurring dividends, they can still be a good investment. In this way, they are much like any other startup but without the loftier goals of most (changing the world or even organizing its information is definitely beyond their charter). Remember, shell companies don’t actually make anything themselves and are literally an empty shell. They have also been referred to, somewhat derisively as “blank-check companies”. As Kostigen points out, trust in shell companies has increased with the arrival of underwriters such as Goldman Sachs and Citi, along with increased financial regulation. Rather than goods or services, investors place their faith in management teams with a track record of acquiring companies and grooming them for a public offering. Your financial advisor can help you make the determination as to which SPACs fall into this category.
How have SPACs performed?
SPACs are on a roll. In 2020, according to the Harvard Law School Forum on Corporate Governance, they “raised as much cash as they did in the entire preceding decade.” And two-thirds of that was raised in the Fall of 2020. MarketWatch reports that “a record 82 special purpose acquisition corporations went public this year to raise a record $31 billion”. The sheer number of these IPOs and the amounts raised are an indicator that more will be forthcoming. But do they make sense for private investors? While the highest profile companies such as Nikola (electric vehicles) DraftKings (fantasy sports) and Virgin Galactic (space tourism), have been successful going public this way, financial advisors warn that these are the exceptions not the rule. In fact, the average return is negative according to the Harvard Law School report, making it a risky proposition.
According to MarketWatch, in 2020 Nikola was up 232% year-to-date (some of that Tesla hype rubbed off), DraftKings was up 258% year-to-date (despite no major sporting events), and Virgin Galactic was up a comparatively minor 35% (private citizens aren’t headed to the moon just yet).
SPACs are a blank slate, ready to be filled out with whatever an acquired company can bring to the merger. As we’ve seen, the right acquisitions can lead to success. But private investors looking for a quick buck might be better off looking elsewhere.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.