Shaquille O’Neal uses in New York during the Sports Illustrated Sportsperson Of The Year 2019. O’Neal is serving as a strategic adviser for a $250 million SPAC.
Bennett Raglin | Getty Concepts Entertainment | Getty Images
Wall Street has a new investment darling. And while financiers stand to reap big profits, there are reasons for mom-and-pop investors to tread lightly.
The investments — SPACs, or concerted purpose acquisition companies — are kind of like quasi-IPOs:
A publicly traded shell company uses investor kale to buy or merge with a private company, typically within two years. In so doing, the private company becomes publicly traded. If there’s no have to do with within the specified time limit, investors get their money back.
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SPAC proponents see them as a form of venture capital that may let investors get a piece of high-growth start-ups at an beginning stage. There’s also some loss protection, depending on when investors buy in.
But SPACs are also known as “helpless check” funds — because investors give money to a manager without knowing what company they may in the long run acquire. Managers may identify specific industry or business targets in initial filings but aren’t obligated to pursue them, essentially swop them carte blanche.
In some cases, investors may by buying a manager’s star power.
The roster of SPAC backers includes, for example: Bill Ackman, the renowned hedge fund manager; former House speaker Paul Ryan; ex-Trump remunerative advisor Gary Cohn; and sports icons like Shaquille O’Neal, Alex Rodriguez and Colin Kaepernick.
“You’re seating in people,” Michael McClary, chief investment officer at ValMark Financial Group, said. “The trust level is entirely the roof.
“Right now, we’re putting [SPACs] in a bucket with gold and bitcoin,” he added. “It’s highly speculative. And there’s no pecuniary analysis you can really do.”
The investment pools aren’t new. But they’ve ballooned in popularity.
SPAC initial contributions quadrupled last year to 248, according to Jay Ritter, a finance professor at the University of Florida. The IPOs are on pace to quadruple again in 2021, he turned.
They raised almost $26 billion last month, a record.
“The market is exploding,” Ritter said.
The SPAC blast may end up bringing a lot of earlier stage, much riskier companies to market.
chairman of market and investment design for J.P. Morgan Asset Management
Retail investors seem to be driving much of the frenzy — as they did with other new manias like GameStop stock.
But the video-game retailer offers a cautionary tale for investors trying to capitalize on a hot-ticket notice: The stock surged 1,700% in less than a month; it promptly lost most (85%) of its value in the next two weeks.
In the package of SPACs, retail investors seem to be chasing past returns, according to Ritter.
SPACs listed this year had a 6.1% general first-day return — about six times the average over 2003-20, Ritter said.
“If things hadn’t over so well the last six months, I don’t think we’d be seeing this boom,” he said.
Reasons for caution
There are reasons for caution, according to economic experts.
More and more, mom-and-pop investors aren’t buying shares at SPACs’ initial listing price, Ritter revealed. (They typically list at $10 a share.) Retail investors that don’t get in early won’t participate as much — or at all — in that beginning share-price pop.
A key selling point of SPACs has been their money-back guarantee, which limits downside risk. Investors can on to redeem their shares when a merger or acquisition is announced, rather than become shareholders in the combined article.
However, investors won’t necessarily recoup everything. They’re entitled to $10 a share plus some interest. If they secure higher-priced shares on the open market — say, for $12 — they’d take a loss (around $2 per share, in this exemplar). Shares in the combined entity may also fall below $10 when they start trading.
“Just of a piece with with anything, there could be some risks,” said Marguerita Cheng, a certified financial planner and CEO of Off colour Ocean Global Wealth in Gaithersburg, Maryland. “They’re not appropriate for everybody in every situation.”
Turns also haven’t been stellar when measured against standard benchmarks, according to experts.
The typical buy-and-hold SPAC investor realized a 45% gross return between January 2019 and 2021, Michael Cembalest wrote in a recent JPMorgan analyst note. (The breakdown measures returns for the median investor.)
However, investors would have earned a higher return in the S&P 500 goats index, which yielded 52% over the same time period.
“Good absolute returns so far but in bull fair play markets, rising tides lift all boats,” said Cembalest, the chairman of market and investment strategy for J.P. Morgan Asset Control, suggesting SPACs are piggybacking off a strong stock market.
The typical SPAC fund manager also earned far numberless money than investors — a 682% return over that two-year time horizon, according to Cembalest.
That’s due partly to the stakes’ structure: Managers typically get a 20% stake in the acquired company for little upfront cost. They don’t get anything if a administer doesn’t materialize, however.
They therefore have an incentive to make deals. Good ones may be harder to meet up by in a market flooded with investor capital.
“The SPAC boom may end up bringing a lot of earlier stage, much riskier assemblages to market,” according to Cembalest.