Financially Speaking | Fall 2021
Surveying SPACs: A Skeptic’s Stance
Special purpose acquisition companies are raising record amounts of capital, but are they worthwhile investments?
Mark J. Gilbert, CPA/PFS, MBA
President, Reason Financial Advisors
As accountants and advisors, many of us know of successful private companies run by
exceptionally intelligent leaders. Perhaps some of us would love to invest in them, or in
other equally successful private companies. After all, the market for investable public
companies is small compared to the private company market: According to the World Bank,
there were 4,266 publicly traded companies in the United States at the end of 2019. At the
same time, there were, at least by one estimate, about 7.5 million privately held companies.
That’s a ratio of at least 1,700-to-1. Not all private companies are worth investing in, of course,
but doesn’t it seem that the private company market is an untapped investment
opportunity? After all, angel investors, venture capitalists, and hedge funds invest in private
companies—why can’t the rest of us? Special purpose acquisition companies (SPACs) are
a way to do just that.
SPACs are publicly traded corporations which have been set up for the purpose of taking
privately held companies public without going through the traditional initial public offering
(IPO) process, thus simplifying the process. These corporations raise funds from investors
based merely on the sponsor’s intent to find a great company to invest in. SPACs will often
identify a target industry or some other area of focus—technology, electric vehicles, and
renewable energy companies have recently been attractive targets for SPACs. SPACs are
typically short-lived, as they’re generally required to invest the funds they’ve raised within
a period of 18-24 months after launch or return them to their investors.
While SPACs have been around since 1993, they used to be regarded as a less desirable
method for a privately held business to go public than the traditional IPO process. However,
the rising costs of traditional IPOs, coupled with the interest of wealthy entrepreneurs to
personally diversify their own investments, has led to increasing enthusiasm for SPACs over
the past two years. According to the Wall Street Journal, SPACs raised $83 billion in 2020,
which exceeded the combined amount raised in all prior years. In the first quarter of 2021
alone, SPACs raised about $100 billion. By the end of the first quarter of 2021, there were
approximately 400 funded SPACs looking for privately held businesses to acquire.
But SPACs may start experiencing some growing pains as their tremendous growth
rate has attracted greater levels of scrutiny. In April, the SEC released a statement requiring
that the warrants which SPACs create and distribute to their initial investors be treated
as a liability rather than equity, thus increasing their expenses and weakening their financial positions. Only time will tell whether this accounting issue will negatively impact the continued viability of SPACs as a vehicle for taking businesses public.
So, are SPACs worth investing in? As SPACs hold a host of companies in a variety of industries, it can be difficult to draw an unqualified conclusion. Lumping all SPACs together is like judging the collective performance of every company in the S&P 500. With that said, the IPOX SPAC Index of 30 of the largest SPACs was down 2.08 percent year to date through June 30, 2021 after putting up strong numbers in previous years. Worse off is Morgan Creek’s Exos SPAC Originated ETF, which launched on Jan. 26, 2021 and was down 16.1 percent through June 30, 2021.
Overall, I think it’s wise to approach SPACs with skepticism. Because these entities are merely promising to invest in companies that meet their profile and criteria, investors don’t know what they’re ultimately getting in exchange for their investment dollars. Really, SPAC investors are buying into the reputations and past achievements of the SPAC’s sponsors with the expectation that they can repeat their past successes. Because SPACs have recently raised so much capital that must be deployed within a two-year timeframe, there’s also an increased risk of them investing in private companies that aren’t the best targets. And even if all SPACs find great companies for acquisition, the tremendous capital available could result in SPACs competing over acquisition targets and paying prices that are too high under reasonable valuation assumptions. Furthermore, it’s likely that regulators will continue to crack down on SPACs to protect ordinary investors’ interests, which could ultimately make SPACs even less attractive investments than they’ve been in the recent past. For all these reasons, I advise investors and financial advisors to be very cautious when considering SPACs as part of an investment portfolio and long-term financial plan.