SPAC market glitters, but may not be golden

Casey Bear |

Special-purchase acquisition companies—or SPACs— are enjoying a moment of unprecedented popularity.  More than 600 new SPACs launched in 2021[1], a record year for the investment vehicle.  The premise of a SPAC can be alluring to those seeking speculative corners of the public markets.  In a flashy display, a SPAC can raise millions or billions of dollars in an initial public offering without revealing how the capital will be spent, creating the equivalent of a “blank check” for the SPAC managers.  Investors, especially retail investors not privy to private deal making, aren’t told what the SPAC managers will invest in or when.  Eventually, the SPAC may take a private company public through acquisition, presumably adding value for SPAC shareholders.  

In practice, however, investors have too often been left with tarnished goods.  A Harvard Law study found that the median SPAC issues shares for roughly $10 and values their shares at $10 when they merge, by the time of the merger the median SPAC holds cash of just $6.67 per share[2].  The DeSPAC Index, which tracks 25 companies that went public by merging with a SPAC, was down more than 43% in 2021, while the broader IPOX SPAC Index of 50 SPACs was down almost 20% during the same period.

Recently, SPACs backed by celebrities like Shaquille O'Neal, Martha Stewart and Jay-Z have brought even more attention to this special type of investment vehicle.  Unfortunately, tying a big name to a SPAC doesn’t translate to a big payday.  According to Bloomberg, 21 out of 33 SPACs tied to famous public figures posted negative returns for 2021, with an 11% average drop across all 33 SPACs[3].

Despite their reputation as this year’s “shiny new thing”, SPAC investments should still be approached with caution.  Speak to your Cranbrook Wealth investment professional for more information.