In November of 2021, I authored a blog on S.P.A.C.s, or Special Purpose Acquisition Companies. At the time, it was one of the hot trends on Wall Street gaining popularity in issuance and investor interest. As a refresher on what exactly a S.P.A.C. is, or purportedly is supposed to do in the investor world, the following helps explain this complex investment vehicle.
The original S.P.A.C itself makes no products, software, or services that generate any revenue. There is no value beyond the intangible investing skills of the S.P.A.C. sponsor. Initially, the only assets are the funds raised in its own Initial Public Offering. Investors are putting their faith in the sponsors of the S.P.A.C. to find value in the market for private companies.
Operationally, the shares are valued at $10 per share, placed in a trust, and earn interest before a company purchase is made. The sponsors of the S.P.A.C. then look to find a private company to purchase and must gain approval from the S.P.A.C. investors. If approved, S.P.A.C. investors receive shares in the newly merged company, or they may receive their original investment plus interest back if not aggregable to the purchase.1
S.P.A.C. sponsors have a deadline to complete a suitable deal, usually within two years. Otherwise, it is liquidated, and investors receive their principal back and interest. In 2022, many S.P.A.C.s, including the largest, returned funds after suitable target companies never emerged and increasing regulatory scrutiny of S.P.A.C.s in general. 2
The incentive for the S.P.A.C. to put that money to work is heavy, and sometimes can be rushed if deadlines are looming. One of the reasons is that typically, S.P.A.C. sponsors receive “Founder Shares” which may entitle them to 20% the common shares in the new company brought to market in the I.P.O.
My original comparison to SPAM is that the food is really a big unknown. When investing in a S.P.A.C., you do not know what you are buying. Investor parlance often refers to S.P.A.C.s as “blank check companies” in reference to the unknown company to be purchased. In many situations, investors in S.P.A.C.s may not even know the sector or the geographic region they are seeking purchase in. It is in fact, a leap of faith. Much like determining what is in Spam!
S.P.A.C.s have grown tremendously with investors during the market upswing of 2020-2021. Each bull market seems to introduce a set of speculative instruments that catch an investor’s fancy. When markets are rolling along, investors seek more and more return through greater risk investments. S.P.A.C.s fit that investor psyche perfect during the recent bull market. Fast forward to today when the market is much more discerning, and S.P.A.C.s are being thrown out like a last week’s trash.
So much so, that since the time of the original article published November 22, 2021, to February 1, 2023, the DSPC Exchange Traded Fund, representing a collection of S.P.A.C.s holdings, was down over 75%!3 While some have endured, overall, S.P.A.C.s have been beaten up in this risk-off environment.
Fragasso Financial Advisors steers away from these types of investments and securities given the inherent risks. We adhere to the textbook principles of asset allocation, diversification, and risk management. Risk management is critical when managing your investments and as a fiduciary, Fragasso puts great effort into managing this part of the investment equation, regardless of the environment or when speculative vehicles catch investors’ attention.