SPACs Lack Payback: You May Want To Give Them A Miss

SPACs Lack Payback: You May Want To Give Them A Miss

over 3 years ago2 mins

“Special-purpose acquisition companies” (SPACs) are all the rage – but on closer inspection, investors may want to keep well BAC 🙅‍♂️

What does this mean?

SPACs are shell companies which exist solely to list shares on a stock market – raising money from public investors which they then spend taking over other, usually private, companies. Such mergers represent a simpler alternative to initial public offerings (IPOs): the SPAC effectively becomes the target firm or firms, allowing their previously private investors to sell shares and anyone else to buy them. The SPAC’s initial backers, meanwhile, hope their stakes will rise in value.

Such vehicles – almost exclusively US-based – have raised more than $50 billion from return-hungry investors so far this year, up from $14 billion in 2019. Airbnb recently resisted the advances of legendary investor Bill Ackman’s blockbuster SPAC, while Playboy Enterprises last week succumbed to temptation. But history suggests that investors should exercise caution.

Blank-check companies represent 20% of the cash raised by global IPOs this year
Blank-check companies represent 20% of the cash raised by global IPOs this year

According to bank Renaissance Capital, the 89 SPACs completing mergers since 2015 have delivered an average loss of 19%, compared to the average IPO stock’s gain of 37%; fewer than a third of companies which “went public” SPAC-style show positive returns. Investment research firm Leuthold Group, meanwhile, looked at the 60 SPACs which one big bank helped complete mergers between 2004-2020 – and found that, of the 34 companies still listed, the average loss was 56% 😵

Why should I care?

SPACs promise investors private equity-style deals with public liquidity – as well as a say on target selection, with the option of getting their money back. And there have been some big successes: shares of space company Virgin Galactic have more than doubled since its SPAC merger last year.

2020’s SPACs include sports contest firm DraftKings – which has seen its stock price soar 400% – but also controversial electric truckmaker Nikola. SPACs’ rising average size may allow them to target larger and more credible private companies, but some worry that too much cash is competing for too few quality opportunities. SPAC founders typically get just two years to make acquisitions, but 20% control post-takeover – which all but guarantees their own profit. These factors may encourage them to pursue risky deals, potentially at IPO investors’ expense.

45% of 2020’s sector-specific SPACs are focused on tech acquisitions
45% of 2020’s sector-specific SPACs are focused on tech acquisitions

For Finimizers who are interested, the first SPAC-focused exchange-traded fund – launched just last week – offers an easy way to jump on the bandwagon. But you might want to wait until next week, when our brand-new Pack on the subject comes out… 😉

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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