HUNTSVILLE, ONT. -- Let's begin with the basics.
Special purpose acquisition companies (SPACs) are often referred to as blank cheque companies. They don't have specific business plans, and their primary purpose is to merge or acquire a private company at some point – typically within a time horizon of two years. If a deal doesn't happen, the SPAC must be dissolved and the proceeds returned to the shareholders.
These are not new products – they have been around for a few years – and yet their popularity is growing.
There are many companies that would like to be listed on a prestige exchange and gain access to the capital markets, but the process to do so is lengthy and costly. It could take a couple of years for an initial public offering to work its way through the system, while a SPAC can be completed in six months or less.
Another key distinguishing factor in this product: because a SPAC doesn't physically own assets, anyone who decides to invest in them is placing a bet on the founder of the fund. In other words, they are betting on a founder having the right connections at the right time to bring a new and exciting company to market.
Traditional IPOs have been on the decline for a while. Companies with high brand recognition including Uber, Airbnb and DoorDash, chose to stay private until they became multi-million dollar companies. The result is that the retail investor missies out on the initial gains. A SPAC allows them entry early on and is a cheaper, quicker and less intensive way to garner investor attention.
But is a SPAC right for you?
To begin with, in my opinion, no investment is ever right for you unless you know what you are invested in.
I reached out to Paul de Sousa, senior vice-president and investment advisor at Sightline Wealth Management, and asked what a novice investor should look for.
He suggested a portfolio of SPACs, professionally managed by someone with excellent deal flow and a conservative strategy. The key is the entry price, he said. Most investments can go to zero, whereas a SPAC has a net asset value of $10 and returns investors' money if they are not interested in the acquisition.
Provided that managers buy at the IPO, and there are warrants – free shares – or partial warrants to sweeten the returns, it reduces the risk.
The risk is greater when SPACs are purchased at a premium in the secondary market. If the acquisition isn’t well received, it will trade down or below trust value.
SPACs are hot because the traditional IPO model is expensive, onerous and time-consuming. Year-to-date, there have been 280 SPAC IPOs, already more than in all of 2020. One more thing worth mentioning: this new and different option is not only going to get investors' attention, but regulators' as well.
