In 2020 we saw a new resurgence in an old investment vehicle called a SPAC. SPAC stands for Special Purpose Acquisition Company which is essentially a “blank-check company” with no operating history. Its sole purpose is to raise funds through an Initial Public Offering (IPO) to finance an acquisition, merger, or facilitate the combination of private companies. While SPACs have been around since the early 1990’s, they were used sparingly by sophisticated investors. That dynamic changed dramatically as we witnessed a whopping 248 new SPACs formed in 2020, raising $82 billion. This amount is more than was raised in all previous years combined. The trend seems to be accelerating. In January alone, SPACs raised over $26 billion.
One reason for SPACs’ popularity is that they provide a quicker path for a company to go public without jumping through the hoops of a traditional IPO. The traditional route is more time consuming and expensive. Think of it this way…a traditional IPO is a company looking for money, whereas a SPAC is money looking for a company. A SPAC is a legitimate vehicle if used properly. DraftKings and Virgin Galactic are companies that went public through SPACs last year. While it was a successful tool in those cases, the volume and size of these deals has us wondering if a full-blown mania is occurring. Famous people such as Shaquille O’Neal, Paul Ryan, Serena Williams and Alex Rodriquez are all sponsoring SPACs. As you might have guessed, these sponsors can have tremendous upfront payouts, and incentives that are not aligned with long term investors. Speculators have become so enthralled with the idea of making a quick buck, many SPACs will double or even triple from their IPO price even before an acquisition is announced. Investors need to understand the pros and cons of these vehicles and unfortunately, many public investors are likely to be disappointed. Research performed by Renaissance Capital noted that of the SPACs that have completed a merger or taken a company public since 2015, the median return was a -29.1% cumulative loss. Only 29 of those SPACs had a positive return. Buyer beware!