• Charles Heighton

SPACs versus IPOs, which one is best for investors.


By Charles Heighton – The London Financial Markets Editor and VP of Trading at King’s Global Markets


Special Purpose Acquisition Companies (SPACs) have had a resurgence this year causing many investors to throw money behind these blank cheque gambles. These companies offer private businesses a third way to go public instead of an IPO or direct listing.


SPACs are completely different beasts; they have different risks and require placing huge amounts of trust in the big names that set them up. Some of which have dubious connections to the financial world. For example, Billy Beane, who was made famous by the film Moneyball, and Paul Ryan a politician.


These celebrity founded SPACs are like celebrity endorsements in the US election, do they look good, yes, but do they mean the candidate will be a good president, definitely not. This does not mean that some SPACs will not be successful, as with any class of investments, some will achieve stratospheric returns, while others will fail. The majority will probably achieve a below-market return after the furor ends. The below chart shows how exceptional this has year has been.


Source: https://investmentu.com/top-reasons-avoid-spacs/

If one were to believe that SPACs could achieve an above-market return, the best way to gain exposure to these vehicles would be an ETF. As you might expect, one already exists for SPACs and for the more traditional IPO. There is little one cannot find as an ETF, which gives retail investors a cheap and easy way to invest in these riskier strategies. To be clear, I am not advocating for anyone to invest in SPACs or IPOs, you would be better just tracking the market. However, if you must put your money into one of these approaches, the data suggests that an IPO ETF has achieved better results in the past few months. The headlines would suggest that SPACs are the future, but IPOs are putting up a fight according to the data.


Source: https://ritholtz.com/wp-content/uploads/2020/10/Screen-Shot-2020-10-22-at-3.42.29-PM.png

The performance of SPACs in the near future is also likely to decline as competition has grown exponentially. There are only so many legitimate and viable start-ups that are currently large enough to go public via a SPAC. This may lead to even less developed, and possibly pre-revenue companies going public as they did back in the Dotcom bubble. Not only does this lead to poor returns but it can also enable fraud to slip through the cracks. Nikola, the EV maker has already listed via a SPAC earlier in the year and has had a rocky few months after serious accusations of fraud. If this SPAC madness continues, these kinds of frauds will probably become even more common. The quality of the companies being chosen as targets will also probably continue to fall, for instance, Playboy, who went public via a SPAC at the beginning of October, a company far from its prime.


If you want to put money in a SPAC or even an IPO, then go ahead no one is stopping you. Just remember that SPACs place blind faith in the founders. You are trusting them to find a good company, sure you can just sell out before the merger if you do not agree with the choice. But the opportunity cost of leaving your money in a flat investment for months, if not years, with a chance of cashing out with zero profit does not seem like an appealing investment to me. Never invest because of hype or celebrity, for every penny that you place outside of an index tracking ETF you should be certain that you are likely to achieve a higher return than the market. If not, what is the point of investing in it?


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