Matt Bacon         Sept 25th

SPAC is shorthand for Special Purpose Acquisition Company, and if that’s a new term for you keep reading. This is the latest financial innovation to gain popularity on Wall Street and money is currently flooding in. 82 SPACs went public this year with a record $31bn raised and we still have three more months before the years’ end. Fund flows are likely to keep trending this direction as investors hungry for overnight success look for an easy win. Sadly, SPACs probably won’t be the saving grace many believe them to be.

SPACs have no commercial operations

You read that correctly. These are vehicles that are set up strictly to acquire other companies. They provide no goods or services and only exist on paper.

They have no stated goals

SPACs don’t tell their investors what they’re buying. This is why they’re frequently called “blank check” companies. At the time of their IPO, they have no business operations and no stated targets for acquisition.

They come with an expiration date

A SPAC has two years to snap up a company. They have to return money to investors if they can’t get a deal done in that timeframe. Wall Street hates having to return money, which means these SPACs typically manage to buy something. But as the adage goes, when you’re looking for a deal you rarely find a good one.

All the cool kids are using them

Former Vice Presidential candidate and Speaker of the House Paul Ryan has sponsored a SPAC, as has former Oakland A’s manager and famed Moneyball protagonist Billy Beane. Traditional Venture Capitalists (VCs) are flocking to them as well, with Pershing Square’s Bill Ackman launching the largest SPAC ever this year with a record $4bn raised!

They can expedite the Initial Public Offering (IPO) process

The Sarbanes-Oxley Act (SOX) of 2002 was born out of the dotcom crash as a law meant to help protect investors. Compliance with the act is costly and time consuming for private companies. Selling shares of a company to a SPAC, which is already public and SOX compliant, can be a cheaper and faster option than an IPO for companies that are ready to go public.

Managers make sweet fees

Manager fees in a SPAC generally run about 2% of the SPAC value plus $2m. The 2% is usually earmarked for the underwriter’s fees involved in going public. The $2m generally covers operating expenses and a reserve for the ongoing due diligence process involved in finding a deal.

They usually come with warrants

SPAC investors that buy shares are typically given warrants as well, which is a security that allows the investor to buy more stock of the issuing company for a preset price at a future date. Think of it like a signing bonus – it’s a little sweetener to motivate you to sign on the dotted line and buy in.

They tend to buy larger companies

There is no maximum size target company for a SPAC to acquire, just a minimum threshold (no less than 80% of SPAC value). Many SPACs look to acquire companies with greater market cap than their own. Shortfalls are frequently made up from PIPE deals (Private Investments in Public Equities).

Investors can vote and opt-out

Although SPAC investors don’t select the deal(s), they can vote to opt-out of any target opportunity and receive a reimbursement. This provides an advantage over the “blind pools” in a traditional VC structure of private acquisitions.

Investors aren’t treated equally

Institutional investors sign a non-disclosure agreement and are told what the acquisition target is before anyone else. This creates informational asymmetry with the retail investors in the SPAC. However, retail investors can trade their shares at any time. Institutional investors are restricted from trading their shares for at least the first four months from the time that the initial business combination is made public.

 

The Vanguard Small Cap ETF (VB) costs just 0.05%. Compare this to the 2% plus $2m of a SPAC; you’re betting on an outstanding return at that price. How likely is the SPAC to outperform any of the other similarly sized companies that make up a small cap index?

Moreover, these vehicles come with an expiration date and Wall Street hates sending money back. Our guess is that these SPACs find deals to keep their 2% + $2m even if they the deals aren’t great. Retail investors can opt-out of the SPAC and get a reimbursement after a target acquisition is announced. Great! But does the average person have the securities analysis background to evaluate the deal and make an informed decision? Probably not.

These are high risk, high fee, and potentially high reward vehicles. Some of these are going to do phenomenally well. Many won’t. Be careful where you place your funds.

REGULATORY DISCLOSURE

Carmichael Hill & Associates, Inc. is a U.S. Securities and Exchange Commission Registered Investment Advisory firm. Registration does not imply that the SEC has endorsed or approved the qualifications of Carmichael Hill or its respective representatives to provide any advisory services. Advisor does not render or offer to render personalized investment advice or financial planning advice through this medium. Advice can only be given after:

  1. Delivery of a disclosure statement by advisor to client.
  2. Execution of our Investment Advisory Agreement between the client and the advisor.
  3. Initial payment of the planning fee or investment advisory fee by the client to the advisor.
  4. Advisor will not solicit or accept business in any state in which she or he is not properly registered or otherwise qualified to conduct business by virtue of a state “de minimis” exemption.
DISCLAIMERS

The information in this web site is based on data gathered from what the Advisor believes are reliable sources. It is not guaranteed as to accuracy, and does not purport to be complete and is not intended as the primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. The identification of specific funds and model portfolios is being made on the assumption that the investor would participate in that investment or portfolio on a long-term basis and only after consulting with their investment advisor to determine their needs and tolerance for risk. With respect to any such identification, there can be no assurance that the fund or model portfolio will in fact perform in the manner suggested.

The results do not represent actual trading due to the timing of the clients’ trades and their trading costs. They may also not reflect the impact that material economic and market factors might have had on the advisor’s decision making if the advisor were managing the clients’ money. Investment and portfolio results may be different than the results the advisor’s discretionary clients achieve due to the timing of trades and the market conditions.

All references that might be made to an investment or portfolio’s performance are based on historical data and one should not assume that this performance will continue in the future.

LINKS DISCLAIMER

At certain places on this Carmichael Hill & Associates, Inc. Internet site, live ‘‘links’ to other Internet addresses can be accessed. Such external Internet addresses contain information created, published, maintained, or otherwise posted by institutions or organizations independent of Carmichael Hill & Associates, Inc. CHA does not certify, endorse or control these external Internet addresses and does not guarantee or assume responsibility for the accuracy completeness, efficacy, timeliness, or correct sequencing of information located at such addresses. Use of any information obtained from such addresses is voluntary.