What is an SPAC?
The acronym “SPAC” is showing up more often these days because there is some big money behind the revitalized investment approach.
SPAC stands for Special Purpose Acquisition Company, and they are sometimes referred to as blank check companies. SPACs raised more than $80 billion through 237 initial public offerings in 2020, accounting for more than half of the money raised through IPOs. By comparison, SPACs raised just $10 billion two years earlier.1,2
SPACs tend to grab headlines because, on occasion, a high-profile athlete or celebrity is involved. In fact, 15-time NBA All-Star Shaquille O’Neal and baseball executive Billy Bean of Moneyball fame are both involved with SPACs.3
SPACs are development-stage companies that have no specific business plan or purpose. So why on earth are investors pouring so much money into these companies?
Because SPACs are looking to get involved in mergers and acquisitions or create a business combination with one or more businesses. SPACs typically look to invest in companies with untapped potential and attempt to create value by providing the money to help these companies grow. In exchange, SPAC investors take an equity stake in the business.4
Critics say SPACs have come too far too fast, and there is too much money chasing fewer opportunities. They expect SPACs deal quality will fall, which will bring media attention and regulatory scrutiny.5
Like all investments, it’s important to remember that SPACs involve risks, and investment decisions should be based on your own goals, time horizon, and risk tolerance. The return and principal value of SPACs will fluctuate as market conditions change. When sold, a SPAC may be worth more or less than its original cost.
If you see a SPAC that draws your attention, let me know. We’d welcome the opportunity to hear your thoughts, and we may be able to provide some insight.
Nasdaq.com, December 28, 2021
CNBC.com, February 10, 2021
Barrons.com, December 13, 2020
FactSet.com, January 7, 2021
Harvard Business Review, February 18, 2021