Over lunch, I heard Jim Cramer ranting on CNBC that "Anyone who is anyone has a SPAC right now." That's not too far from the truth... legendary hedge fund manager Bill Ackman, NBA giant Shaquille O'Neal, and Congressional house leader Paul Ryan have all started up their own SPACs this year.
Special Purpose Acquisition Companies offer the allure of mingling with the rich (and sometimes famous) and provide an opportunity for rapid gains.
Sometimes known as "blank check" investments, SPACs are type of shell corporation that raises capital in the public market for future acquisitions. Investors pour money into SPACs on good faith, not knowing how their funds will be invested.
Although shareholders have a right to vote on acquisitions, SPACs can go for months or years before making a single deal.
The advantage is that SPACs can provide a back-door path to IPO more quickly and with less oversight than a conventional Initial Public Offering. It's how more deals are getting done during COVID.
Over 200 SPACs have raised funds this year, all of them searching for investment deals. There were just 13 SPAC offerings in 2016.
Sound a little sketchy? Well, maybe.
Several notable companies have gone public via SPAC this year, including Draft Kings, Playboy Enterprises, Virgin Galactic, and Nikola.
Electric truck maker Nikola provided a wild ride for investors. Shares surged 800% last spring, only to lose 75% of their value after the company experienced accusations of fraud.
I've missed out on the excitement of SPACs this year. It feels like a type of bubble that happens when too much money chases too few opportunities.
When I look at investments, I screen out prospects that can't offer three things:
1) Transparency
2) Daily pricing
3) Liquidity (the ability to sell easily)
These three criteria help me to manage problem investments. Transparency makes it possible to know when I've made a mistake. Daily pricing gives me quick insight into the size of the mistake, and liquidity enables me to cut losses before they get completely out of control.
With SPACs, you don't know what you'll end up owning.
I'll take a pass on this "next big thing."
-Jim Lee, CFA, CMT, CFP®
