What if you had been able to invest in Amazon.com before its shares were publicly traded for the first time? Or in another tremendously successful company such as Apple, Netflix or Tesla? Well, if you’re not a hedge fund, big institution or multimillionaire, you couldn’t have gotten in on the “ground floor” because you wouldn’t have been able to invest until after the companies launched initial public offerings (IPOs).
But there’s an increasingly popular way for companies to go public that does give early access to small investors. It’s the method that has been used to raise money by private or venture-backed companies such as electric-truck maker Nikola…space-tourism business Virgin Galactic…and online fantasy sports and gambling site DraftKings, each of which soared in share price, at least initially, and achieved a market valuation in the billions of dollars.
This IPO alternative is known as a SPAC, which stands for special purpose acquisition company. When you invest in a SPAC—usually for around $10 a share—you may not even know what business you are investing in. That’s because a SPAC starts out as a “shell company” that doesn’t operate a business but sells shares on an exchange such as the New York Stock Exchange or NASDAQ. Then, months or even years later, along comes a promising private company that does operate a business…the company gets acquired by the SPAC…and presto, the private company replaces the SPAC and trades publicly under that acquired company’s name and symbol just like any other stock.
So how do you know which SPAC is worth investing in? And what guarantees do you have that you won’t lose all your money? Bottom Line Personal interviewed SPAC Research founder Benjamin Kwasnick to help answer these and other questions…
How SPACs Work
SPACs have been around since the 1980s but have captured headlines this year because private companies suddenly see them as a cheaper, faster, less complicated way to go public in the volatile stock market environment created by the coronavirus pandemic. Nearly 85 SPACs raised more than $30 billion in proceeds this year as of September 2020, more than double the amount raised in all of 2019. SPACs also are known as blank-check companies because they provide investors little information about the businesses they might eventually acquire other than a possible sector or geographic region. Many of this year’s acquisitions have come within the broader technology sector.
SPACs must follow strict SEC regulatory guidelines such as putting the assets raised from investors in a trust account that invests in short-term US Treasuries and pays interest to shareholders until a deal is struck. Typically, a SPAC must make a deal within two years of being launched or liquidate and return shareholder money. Liquidation is rare, however, happening less than 5% of the time, and a deal is made in 14 months on average. Once a deal with a private company is reached, it must win approval from a majority vote of shareholders. If you want out after the deal is announced but before it takes effect, a SPAC must allow you to sell your shares for the amount in trust, typically a bit more than $10 per share.
Investing in SPACs
As of September, 166 SPACs were searching for acquisition targets, with a combined $52 billion in their trusts. Smart strategies for investing in a SPAC before it finds an acquisition target…
Decide whether you are willing to invest without knowing exactly what you’re investing in. SPACs typically provide less disclosure information than IPOs even after an acquisition deal is announced. Some high-profile SPAC deals have had spectacular results. DraftKings stock more than quadrupled and Richard Branson–backed Virgin Galactic more than doubled before pulling back. But some SPAC deals have fizzled, including Alta Mesa Resources, a fast-growing Oklahoma shale oil company that was acquired by a SPAC in 2018, only to go bankrupt earlier this year as oil prices crashed. Nikola skyrocketed before plunging in the face of fraud allegations.
Focus on the expertise and track record of the SPAC sponsors. They should be skilled dealmakers with past success in mergers and acquisitions—which you can research in the SPAC prospectus. Example: Flying Eagle Acquisition Corp. was a $600 million SPAC that launched in March 2020. The SPAC sponsors were two of the most accomplished executives in the entertainment industry. Jeff Sagansky had been president of CBS Entertainment. Harry Sloan had been chairman and CEO of the movie studio Metro-Goldwyn-Mayer. Together the pair have launched five other successful SPACs since 2011. In early 2020, their previous SPAC acquired DraftKings. In September, Flying Eagle announced the acquisition of Skillz, a platform that hosts millions of mobile gamers who compete for cash and prizes.
Buy shares in the SPAC before a deal is announced. Although the share price of a SPAC often remains at or near $10 a share for many months while an acquisition is sought, it often rises very quickly once a deal is announced.
Three high-profile SPACs you can invest in this year…
Pershing Square Tontine Holdings (PSTH). Launch date: July 2020. Amount raised: $4 billion. Billionaire hedge fund manager Bill Ackman’s previous SPAC was a great success, acquiring then privately owned restaurant chain Burger King in 2012. Ackman has raised more money than any SPAC in history this time and is seeking a “mature unicorn,” an established business valued at $1 billion or more. Recent share price: $21.90.
Social Capital Hedosophia Holdings III (IPOC). Launch date: April 2020. Amount raised: $828 million. Former Facebook executive Chamath Palihapitiya’s previous SPACs acquired Virgin Galactic in April and in September announced the acquisition of Opendoor, an online marketplace for buying and selling houses. Now he plans to acquire a technology company outside the US. Recent share price: $11.98.
RedBall Acquisition (RBAC.U). Launch date: August 2020. Amount raised: $575 million. The SPAC is looking to acquire a sports franchise. Its sponsors include private-equity sports specialist Gerald Cardinale, who partnered with the New York Yankees to create the YES cable-TV network, and Oakland As baseball executive Billy Beane, who gained fame as the subject of the best-selling book and movie Moneyball. Recent share price for RedBall: $10.94.
Bottom Line Personal interviewed Benjamin Kwasnick, founder of SPAC Research, a website that provides data and research on the SPAC market. SPACResearch.com