Today I’d like to talk about a generally more speculative way to invest in stocks, but with the possibility of good returns when done well: investing in SPACs.
“What is a SPAC?”
SPAC stands for Special Purpose Acquisition Company. A SPAC is simply a method for a private company to go public.
A SPAC is a shell company that goes public for the sole purpose of raising money to acquire another company via merger. The company it acquires then goes public by default. These are sometimes called “blank-check companies”.
There are more common methods to go public. Many companies opt to go the traditional IPO route (Initial Public Offering), wherein a large financial institution coordinates all the financials and works with the broader market and advertises to big investors to drum up interest in a company.
Some recent high profile IPOs include Snowflake (SNOW), JFrog (FROG), and soon to be AirBnB. Obviously, IPOs are still a viable option, but the trends continue to battle. Just look at the number of IPOs compared to SPACs in 2020:
However, most retail investors may not get the chance to invest in an IPO at the original listing price. The big institutional investors get their price at the ground floor, while retail investors like you or I have to wait until the stock starts trading and may already be overvalued. SPACs allow investors to get some certainty on the stock price. Which is one reason why there has been such a flood of SPACs hitting the market:
SPACs have had something of a renaissance in 2020. In fact, SPACs have raised more in 2020 than the last 10 years combined, according to MSN Money.
They are a little easier to take a company public with than a traditional IPO due to slightly less legal hoops to jump through and investors may like the idea of getting in on an investment earlier than the IPO route would allow.
Another key feature is that you can invest in a SPAC before it announces the company it plans to acquire. More on the pros and cons of when to invest in a SPAC a bit later in this article.
I’ll also share the SPACs I’ve invested in for educational purposes only.
But first, “How do I invest in a SPAC?”
You can invest in a SPAC once it is listed publicly the same way you’d invest in any other company. Search their ticker symbol.
However, you may see a few variations of the company’s symbol:
- SYMBOL – This is the standard share of the company.
Below are two additional “versions” of a SPAC you can generally buy. Unless you are an advanced and knowledgeable trader, I recommend you just stick with the regular shares.
- SYMBOL-W or SYMBOL+ (Warrants) – Warrants are essentially a call option with a 5 year timeline. These are derivatives though so they have more risk than a unit and a share. (Learn more about warrants and their risks here.)
- SYMBOL-U (Units) – These are a combination of one share of the stock plus one partial warrant.
Again, exercise caution choosing the type of investment you make in a SPAC.
“When can I Invest in a SPAC?”
You can invest in a SPAC at three different points in time: before they announce the company they will acquire, after they announce the company they plan to acquire, and after they’ve acquired the company.
1. Pre-announcement of the acquisition. This means it is just a bucket of money looking for a target company to acquire. At this stage, when you research the company on Yahoo Finance or in your brokerage account, you will find very little information:
- They will have no financials, very little history, only 1 or 2 employees, and a brief description signifying that the company intends to merge with another company. The company will likely trade around 10 dollars per share.
- Because no deal has been announced, there is significant uncertainty in investing at this stage, but with greater risk comes greater potential return.
2. Post announcement of merger. This means the company has announced their target acquisition. The price of the SPAC has likely gone up or down from the initial $10 share price and news will start to flow regarding the future of the deal.
- Because a deal has been announced at this point, there is less uncertainty in investing at this stage. This may mean the price has already baked in the expectations of the merger entirely and then some.
3. Post merger. This is really just investing in a company. The ticker symbol will likely have changed from the SPAC symbol into the newly merged company’s symbol. You’ll want to do all your standard due-diligence at this point and proceed just like any other investment.
“How do I find a SPAC to invest in?”
Some free resources:
Aside from searching online for the variety of SPACs on the market right now, you should ask yourself certain questions to narrow down your interest in a SPAC:
- Who are the key players managing the SPAC?
- What connections in the industry do they have?
- What size company are they planning to acquire?
- What type of company/industry are the owners of the SPAC targeting?
- Do they have a good track record or unique insights into a specific industry?
The creators of these SPAC aren’t doing this out of the goodness of their heart either. They are taking a portion of the shares for their fees.
Try to find a SPAC for which you trust the leadership team, you like the industry they’ve chosen, and you understand the process.
Risks of Investing in SPACs
In addition to a lot of uncertainty, they have a finite window of time to find a deal – about 24 months. There are also a lot of SPACs out there right now looking for a target to acquire. If they don’t find an acquisition in time, they must return their funds to investors.
According to SEC Chairman Jay Clayton, “The U.S. Securities and Exchange Commission is reviewing SPACs because it’s concerned that shareholders don’t fully comprehend how incentives tied to executive pay differ from traditional IPOs.”
I’d also argue shareholders overwhelmingly don’t know how “incentives tied to executive pay” affect a company’s financial health in any case, let alone SPACs. Take Wells Fargo, for example.
So What Am I Doing Personally?
I’ve invested in a few different SPACs over the last year.
Pre-announcement: GIK – This is the symbol for GigCapital3, Inc. which is looking for a company in the technology, media, and telecommunications industries. They have recently had news about taking an EV company public. I invested in this SPAC in December.
Pre-announcement: XPOA – This is the symbol for DPCM Capital, Inc. which is led by a former Uber executive with special adviser Eric Schmidt who is Alphabet Inc.’s former CEO. I’d argue that these folks have the connections and insights to make a good deal. They have not yet announced a target acquisition. I invested in this SPAC in October on their IPO.
Post-announcement: IPOB – This is the symbol for Social Capital Hedosophia II which plans on taking Opendoor public. Opendoor is a real estate startup that helps people sell their homes. Real estate is one of the last industries that has not been improved by technology in any meaningful ways. This SPAC is led by someone who has a good track record of using SPACs to take well-known companies public. I invested in this SPAC in September.
Post-announcement: SBE – This is the symbol for Switchback Energy Acquisition Corporation which has announced they will be taking ChargePoint public. Charepoint is an EV charging company that manufactures and manages charging solutions for private driver stations as well as company fleets. I invested in this SPAC in September.
Post-merger: RIDE – Lordstown Motors trades under the ticker symbol RIDE. They were recently acquired and fully executed the merger with DiamondPeak Holding Co.. I bought my shares when they were still DPHC back in August. My shares transitioned into shares of RIDE on the day they went public. Lordstown Motors is making electric pickup trucks using the GM Lordstown plant that they bought recently. They recently announced they have 50,000 pre-orders for their work truck.
There you have it, the SPACs I’m interested in as well as the many different things to consider as you decide which, if any, SPACs to invest in.
Disclaimer: I am not a financial planner. The advice here given is strictly for entertainment purposes.
All commentary on this article reflects my personal opinions and should not be regarded as a description of advisory services or promise of performance.
The views reflected in my articles are subject to change at any time without notice. Please seek professional help for your finances.
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