Should You Invest In a SPAC? | Erik Averill, Brandon Averill | AWM Insights #23
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Episode Notes
Recently in the headlines, we’ve seen a lot of attention around SPACs (special purpose acquisition company) due to some big names in the investing world doubling down on them this year. So far in 2020, 60 of the 95 IPOs in the US have come from these SPACs and they’ve raised $24 billion further cementing them as the preferred method for going public this year.
So what exactly are SPACs and should you be investing in them? These special purpose acquisition companies are essentially shell companies that raise money from public markets to buy a private company. They have some very interesting characteristics to them that provide some advantages such as lower cost and some flexibility, and disadvantages like the fact that you’re essentially putting all your trust in the management team of the SPAC.
In this week’s episode, Brandon and Erik discuss SPACs and cover questions and topics like:
What is a SPAC?
How do they work? What are some of their unique characteristics?
What are their advantages and disadvantages? Are they considered a good investment?
What is behind their recent surge in popularity?
What should you consider before investing in a SPAC?
Should you expect similar returns with SPACs that you’d see in the private markets?
Ultimately, we would say ignorance is not bliss in investing, but a danger. Like any other single entity investing, we recommend our clients do their research and discuss with their financial professional about how it might fit in their investment portfolio.
Resources
As Erik mentions in the episode, HERE is a link to a fantastic research article on SPACs from Harvard Law.
If you’d like to discuss your specific financial situation to determine if SPACs might be a good option for you, contact us HERE
+ Read the Transcript
Erik Averill (00:00):
Hey, everyone. Welcome back to another episode of AWM Insights, where we cover all things investing. Today, we're going to jump into a conversation that is at the forefront of all of the headlines. Whether it's in the sports world or just in the investing world, right now is we've seen a lot of attention around something called a SPAC. Brandon, can you bring us up to speed a little bit about what is a SPAC? Why is it so popular? We can dive into maybe if this does make sense for our audience.
Brandon Averill (00:30):
Yeah, Eric. I think it's just a super interesting topic right now. We've got to give credit where credit's due. We had a listener, they wanted to discuss SPACs, and I think for good reason. We're seeing them all over the news right now. If you watch any of the talking heads on CNBC or any of these other news channels, they're certainly talking about them. There's no question that SPACs have become the preferred method for going public in 2020. They've raised $24 billion so far this year. 60 in the 95 IPOs in the U.S. have come via these SPACs.
Brandon Averill (01:02):
To get into what a spec is, a SPAC stands for Special Purpose Acquisition Company. Basically, it's a shell company that raises money, in the public markets, to make an acquisition of a private company. Some unique features of these SPACs are that at the time of their IPO, they actually have no business operation. So, it's really just a blind company that you're putting all your faith in the management of to go out after they've raised the money to find some private company and purchase that company, bring it public. And so what you're agreeing to when you put money into this SPAC is you're giving these managers money. They're going to put it in an interest bearing trust account. These funds can't be dispersed for anything except for completing an acquisition or returning the money back to investors. They've got two years to do this, or it's forced to liquidate.
Brandon Averill (01:53):
So some pretty unique features. I think there are some benefits, certainly, that we can get into. But also with all those restrictions, there's also probably some unintended negative consequences as well. So, they certainly require our evaluation of where they fit in your plan, as you mentioned. What's the expected return? What's the risk? It's not one of those things you just throw money into it and kind of hope on. So that's in a nutshell, kind of at a high level, what a SPAC is.
Erik Averill (02:21):
Very helpful. One of the things that's intriguing to me is this is being traded in the public markets. And one of the things that stood out to me is usually if I go and I buy a share of Apple or Microsoft or Amazon or Facebook or Netflix, I know exactly what I'm getting through the public dissemination of information. And there's not really a competitive advantage for one investor over the other. We've talked a lot about that. But you're talking about the fact that I actually don't really even know what this company is going to hold. And so, it is the relying on the fund manager. Can we also, should we expect the higher expected returns that we see in the private markets through this vehicle? What are your thoughts around that?
Brandon Averill (03:08):
Yeah, I think that's a fantastic question. I think one thing we do know right is where do most of the returns come from for private companies. They come when they're private. They don't come when they go public. There is small value creation that potentially is there, but the bulk, the lion's share of it usually comes when they're private. So I don't think we can expect the same type of returns that we would if we were investing in a seed Series A, B, C Rounds. But it doesn't mean it's necessarily a bad investment either. There's some fantastic managers that are raising these SPACs right now. They're probably going to acquire a lot of good companies. Certainly, bad companies will be acquired as well. But I think the other thing to think about is does a good company always make a good investment, and that's not always the case either.
Brandon Averill (03:56):
When we see the popularity of these types of vehicles being raised, this reminds me or kind of the analogy is ... Is this private equity for the retail investor? And usually that sends alarm bells off. That becomes a product that can be sold. And there's a saying on Wall Street, "If it can be sold, it will be sold." And I think we're seeing a little element of this. So a lot of it comes down to the manager. That's why they're also becoming so famous. And when we've got some famous names that are raising these, Bill Ackman with Pershing Square; he's been involved in the sports world. Most of us know Billy Beane, the A's General Manager; he's announced he's partnered with RedBird Capital to raise a SPAC. So we're seeing some famous names get involved here.
Brandon Averill (04:42):
Kind of makes me think, "Hey, maybe there's a little bit of a bubble here." That doesn't mean it's not going to continue working for most of the listeners. They know we don't believe you can time these things. But I also think of as these SPACs become more and more prevalent as the numbers start to go up, as far as money raised, does it turn into, for instance, the SoftBank side on the private market side. They raise a hundred billion dollar fund. You've got to go deploy this, this amount of capital. Are you as judicious when you're evaluating the companies and the valuations that you're purchasing? So a lot to be discussed here. This is only the tip of the iceberg. So certainly, if people have questions, I know you'll reiterate this at the end, but reach out and we can talk more specifically.
Erik Averill (05:28):
Yeah. I think that's great information, Brandon. For our listeners, that's really what this is about. We're really amoral to what investment vehicle that you put into your plan. What's most important that investors should be really asking is: Does this make sense for what my goals are? What do I want my money to do for me? And what are the investment vehicles I need? So, whether it's real estate, whether it's public stocks, whether it's through type of vehicles, the question isn't at a surface level, is this a good investment, because that really depends on your personal circumstance and your appetite for risk and your human capital in your employment, so a lot of those things. So as Brandon offered, if you guys would want to see if a SPAC makes sense specifically for you, we'd love to have that conversation.
Erik Averill (06:18):
If you're looking for some research, there's an unbelievable piece put out by Harvard Law that we're going to put in the show notes. It's from Harvard Law, so expect a research report. This isn't going to be a quick two or three sentence deal. But we always tell all of our clients and investors that if you're going to put your hard earned money into some type of investment, don't take a guess with that. Let's make sure that we understand it and make sure that it's going to help you capture the returns you deserve. And so as always, we super appreciate your guys' attention. We will make sure that that is in the show notes, which you guys can access at: awminsights.com. And also you can ping us if you want to set up a conversation to talk specifically about SPACs or anything else for your specific investment plan. And so as always, stay humble, stay hungry and always be a pro.