Should You Invest in a SPAC?

Written by: Thomas Kostigen

Special Purpose Acquisition Companies, or SPACs, are becoming all the rage in the investment community. They target investors who like the idea of building growth through buying—rather than building—companies, and profiting from the combined entity.

But are SPACs a fad? And, more importantly, are they vehicles in which you should invest? Let’s have a look.

Investopedia defines a SPAC as “a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company.”

Despite their popularity these days (a record amount was raised last year, and this year more than $20 billion has been raised via SPACs), they aren’t new. Blank check companies and blind pool vehicles, essentially are just different names for SPACs. Indeed, a couple of decades ago, there was a surge in popularity around these types of offerings, which are based on faith in the future rather than past successes. Barron’s noted the “everything old is new again” premise for SPACs, but added that they are different now: “It’s a big change from the bad old days. Back then, sketchy investment banks would float tiny companies for a minimal amount of capital, creating public shell companies.” Now, the publication explains, “at least 85% of the cash generated in an initial offering has to be placed in a trust, unavailable to the company and its management until the day they make an acquisition.”

High-profile underwriters such as Goldman Sachs have gotten into the SPAC business, as have billion-dollar hedge funds. What investors are really buying is trust in management. Much like a mutual fund, you really don’t know what the fund manager is going to buy; you believe in his or her track record as well as the mission of the SPAC.

Take the Sustainable Opportunities Acquisition Corporation. It’s a $300 million SPAC that was underwritten by Citi earlier this year. The aim is a dedicated ESG focus. And the management team has a long history in the space. That experience, SOAC says, allows “our management team to add significant value to a target company from a commercial, operating, strategic and sustainability perspective. In particular, we intend to identify and invest in a business that could benefit from the extensive operational experience and the public company expertise our management team possesses, or that relies on the target’s existing executive and operational expertise but presents potential for an attractive risk-adjusted return profile under our stewardship.”

Such value-added language is the hallmark of most SPACs; they believe they can make companies run better and profit accordingly. A good financial advisor can help you decide if investing in a SPAC is appropriate for you and where it might fit into your portfolio.

It should be noted that SPACs can benefit from the boon the private equity industry, acquiring companies that have gone through the venture capital cycle and, rather than seeking a big splash IPO, get rolled into their existing public stock. Done right, there is strong upside potential for every investor —both private and public.

Sure, SPACs offer a whole lot of nothing to begin with — empty shells of companies — but they can make something of themselves. That’s what investors have to bet on.

Related: Investing in Opportunity Zones

Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.