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  • Chip Rewey

Are you perplexed by the current boom in SPACs?

In 2020, there was a 6-fold increase in capital raised by special purpose acquisition companies (SPAC’s), also known as “blank check” companies designed to take companies public without going through the traditional IPO process. SPACs are essentially shell companies formed to allow retail investors to participate in acquiring private companies, particularly from private equity firms looking to exit their holdings as their investment funds wind down. Once formed, these lightly regulated SPACs are not required to adhere to any investment plan and have the option to liquidate after their typical 3-year formation horizon. What is certain is that the SPACs will pay hefty management fees along the way.

In 2020, there were 248 SPACs formed that raised $83.16B, compared to only 59 SPACs formed in 2019, raising $13B. As shown below, this 6-fold increase in capital raised far outpaced any period since 2003.


Caveat Emptor

The surge in issuance in SPACs highlights an increasing trend of risk seeking behavior at the expense of risk control. SPAC investors seem to fear missing out on speculative upside more than a balanced view of risk vs. return. What is missing, in our view, from SPACs is any measure of downside protection. By writing a blank check to a SPAC, investors have no visibility as to what a SPAC may buy and at what price. While many SPAC’s are said to be managed by celebrity managers, they all must seek to bid for assets in a competitive market while offering no merger synergy opportunities. As such, investors in these ‘idea only’ SPACs face the risks of overpaying for assets or overpaying for management teams that never deliver a deal.

Through our experience, downside protection has proved as important for long-term returns as upside potential. Our three investment pillars of financial strength, the ability to grow and valuation provide the visibility to measure both upside return potential and downside risk control.

Over our career, we have consistently seen excesses reduced to reality. Downside protection may only matter when it matters to the market, but it always matters to us.

All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. Views regarding economy, securities markets, or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor. There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses. All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.


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