Within the last few years, SPACs have become numerous and incredibly popular. SPAC stands for Special Purpose Acquisition Company. Huh? Sometimes called “Blank Check Companies”, SPACs are all the rage in 2020 and 2021. But why?
Historically when a private company has a need to raise additional capital to fund growth or expansion – or when the founders are ready to capitalize on the enterprise value of their creation, they would file an application with the SEC for an Initial Public Offering, or IPO. IPOs typically take a lot of time and money to bring to the public markets, so some genius came up with the idea to short-cut the process: enter the Special Purpose Acquisition Corporation, or SPAC.
A SPAC performs a relatively simple IPO, because there is no income, no assets, no liabilities, and no cash flow. It’s simply a shell company that will raise cash from investors via an IPO in order to acquire a private company at some date in the future. Many times the SPAC is initiated and funded without a particular target company in mind.
The most popular SPACs are those sponsored by big name hedge fund managers or celebrity investors. Because of the manager’s elevated status, they may be able to negotiate a deal to acquire a “Unicorn” – a private company worth more than $1 billion. Once a target is acquired, the SPAC then converts their ticker symbol and adopts the financial statements of the acquired company.
The most recognizable and successful SPAC acquisitions from 2020 were QuantumScape (QS) and DraftKings (DKNG). QuantumScape’s stock price has increased 1,000%, and DraftKings 400% since becoming public via a SPAC.
With investment returns of that size, you may be wondering how to identify the next big winner out of the more than 200 SPACs available in the stock market today. Join the club! With no performance history, no financial statements, no products, no management team, it’s totally a gamble as to which SPACs will hit it big...and which won’t.
Luckily, any time there is a sustained theme or fad in the stock market, at least one ETF sponsor will roll out an Exchange-Traded Fund to take advantage of the popularity in the space. As for SPAC ETFs, we now know of three:
- Defiance Next Gen SPAC Derived (SPAK). This fund was introduced September 30th, 2020, and has gathered $100 million in investor money. It holds 137 different SPACs or companies recently acquired by a SPAC. It is a rules-based index fund, so only costs 0.45%.
- SPAC and New Issue ETF (SPCX). This fund came out on December 15th, 2020, and has gathered nearly $200 million in investment. This is an actively managed ETF that costs 0.95% per year and only invests in pre-merger SPACs. So basically you’re buying cash with your cash – with the hopes that one or more of the 76 SPACs finds a great buy!
- Morgan Creek Exos SPAC Originated (SPXZ). SPXZ was established in January of 2021 and has gathered only $45 million in its first month. The actively managed ETF costs 1.0% per year, and holds 91 SPACs, including both cash shell companies and recently acquired companies like DraftKings.
While we are intrigued by the SPAC phenomena, we view them similarly to IPOs. We will likely avoid investing in this fad, unless a specific request is made by a client. Even then, we’ll suggest a very small allocation to SPACs, as it feels more like gambling than investing. There are more than 200 SPACs, and not likely 200 really attractive private companies that will sell/merge for a reasonable valuation. It includes too much risk, and relies too much on the SPAC sponsor/manager finding a good deal in a very competitive market.
But for those interested in SPACs – just as with individual stocks – we’d recommend using an ETF to get broad exposure to the theme.