IN THIS ISSUE:
1. What Is A Special Purpose Acquisition Company (SPAC)?
2. SPAC Bubble: Field Is Getting Crowded, Quality Suffers
3. Conclusions – SPACs Not Appropriate For Most of Us
4. COVID-19 Drives a $24 Trillion Surge in Global Debt
Overview – Special Purpose Acquisition Companies
One of the most popular investment vehicles in recent years is the Special Purpose Acquisition Companies or “SPACs” as they’re commonly called. While SPACs have been around for years, they’ve increasingly become the investment model of choice for Wall Street firms and fund managers who promote them.
While I doubt many of my readers invest in SPACs, they now number in the hundreds, some of which are quite large. Given their wide popularity and aggressive promotion, I thought I would discuss SPACs today and point out their pros and cons.
It is my view that SPACs are currently in a bubble which is ripe for bursting. It is also my view that most investors should just say NO when solicited for these often highly speculative ventures. Let’s get started.
What Is A Special Purpose Acquisition Company (SPAC)?
A SPAC is a company with no commercial operations which is formed merely to raise capital through an Initial Public Offering (IPO) for the purpose of acquiring an existing company (or companies). SPACs have been around for decades, but in the last few years, they've become significantly more popular, attracting big-name underwriters (including Goldman Sachs and other Wall Street wire houses).
SPACs are generally formed by Wall Street sponsors or large investors with expertise in a particular industry or business sector, with the intention of pursuing acquisition deals in that area. In creating a SPAC, the founders sometimes have at least one acquisition target in mind beforehand, but they usually don't identify that target to avoid extensive disclosures during the IPO process.
This is why SPACs are often referred to as "blank check companies," since their investors have no idea what companies they ultimately will be investing in. SPACs seek underwriters and institutional investors before offering shares to the public.