The Capitalist Investor - Episode 55

What is a special purpose acquisition company (SPAC)? What is its purpose? What is the risk versus reward with a SPAC? Should you invest in one? To be honest, we had no idea what a SPAC was until recently. We aren’t alone—many people don’t know how it works or how it affects their investments. So in this episode of The Capitalist investor, we break down these questions and give you answers.

Outline of This Episode

  • [2:36] What is a SPAC?
  • [4:57] Our take on SPACs
  • [9:07] The recent SPACs
  • [10:36] Our final thoughts on SPACs

What is a SPAC?

A SPAC is an alternate way to take your company public. Going public is a long time-consuming and difficult runway. You put your company out at an IPO price. You typically see a big upside swing for that stock. DoorDash can out at $102 per stock and may open around $142–$150.

Raising capital through the SPAC process controls the share price a little better. Secondly, it can avoid market volatility. If your IPO came out SPAC-dab at the beginning of the pandemic it was probably met with high volatility.

So what if you’re the one investing in the SPAC? If you’re the one investing, A SPAC is basically the same thing as a private equity fund that is easier to get into.

Our take on SPACs

Chamath Palihapitiya is a huge proponent of SPACs. But based on his Twitter posts, it seems like he’s waiting for people to send the good ideas his way. He’s basically saying, “I want to be a billionaire, but I don’t have a good idea.” You get these shell companies that money flows into before it invests in a specific company to launch as an IPO. Investors blindly place their confidence in the person running the SPAC. They don’t know how the money is going to be spent. It’s risky.

It would be like telling one of our clients to put their trust in us and a SPAC that we can’t tell them anything about—other than we trust the person running it and they have a great track record.

It seems like a way for the little investor to play the IPO game. But there’s a reason private equity funds are only available to accredited or qualified purchasers (who can obtain $5 million+). Why? Because they can afford to lose a lot of money and they’re typically more savvy investors. A Robinhood trader with $1,000 has always been excluded—and probably for a good reason. A SPAC can be very dangerous to invest in.

The recent SPACs

There have been some success stories lately, which may continue moving forward. DraftKings is one example. The stock was on fire until they did an additional stock offering below the going price. So investors began to think it was over-valued. The SPAC merged with the real company (DraftKings) and that is the company that went public.

Virgin Galactic has also done very well (they’re worth $8 billion). Their thesis is that anyone with a net worth of $5 million or higher are in their addressable market. But would any of our clients with $5 million-plus take $250,000 to fly to space? Not likely.

In 2020, 80 IPOs have raised capital through SPACs with an average size of 400 million. An additional 24 are in process for $6 billion. It’s already more than 2016–2019 combined. It’s another way for investment bankers and large accounting firms to make money.

Our final thoughts on SPACs

If you are not an accredited investor (under $1 million) and would not invest your money in a private equity fund, you should stay away from SPACs. Just because they’re the “cool thing” doesn’t mean you should own them.

If you do want to get into a SPAC, there is an ETF called “SPAK.” It’s unmanaged, but it would give you some diversification in your portfolio. It does contain some SPACs that have not emerged yet. If you want to get into something like this, make it an appropriate portion of your portfolio. Be reasonable and choose the right allocation. It can offer some diversification away from the S&P 500—and it’s a growth play.

Resources & People Mentioned

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Keep Listening to The Capitalist Investor:
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Episode 31:
Handicapping the 2020 Election, Ep #31
Episode 47:
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Episode 63:
Jeff Bezos and Amazon: Past, Present, and Future Ep #63
Episode 79:
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Episode 95:
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Episode 111:
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Episode 127:
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