The SPAC Fad

Gray cat stretchThe value proposition of many SPACs is a bit of a stretch if you ask Hazy Cat.

SPACs are having (another) moment.  SPAC stands for Special Purpose Acquisition Company.  Often referred to as “blank-check” companies, a SPAC is initially just a management team.  The team raises funds via IPO.  Investors bet that the team will buy a private business and make it more valuable.  Usually, the team specializes in a particular area.  The last time SPACs were popular, management teams with experience in the energy sector were buying shale assets.  Today, SPAC activity covers a wider range of ground.  From gambling (Draft Kings) to space travel (Virgin Galactic), money is being raised to sidestep the traditional IPO in favor of SPACs.

Not All Good

Electric truck maker Nikola was an early darling of the SPAC movement.  Nikola was supposed to be the Tesla (get it?) of the truck world.  Truck orders poured in from Anheuser-Busch.  Large investment firms across the world scrambled to buy in.  General Motors announced that they intended to partner with Nikola and buy an 11% stake.  The problem: the truck didn’t actually work.  A commercial with high production values showed the vehicle rolling.  Nikola says they never said the vehicle was moving under its own power.  They later pivoted to the truck being “gravity powered” and that it could have been battery powered if they had completed a working drivetrain.  The last three letters of Ford stand for “Only Runs Downhill” so Nikola is late to that market.  Short-sellers are accusing Nikola of fraud.

Other Warning Signs

Once an investment fad is identified, the compilers move in.  Can’t decide which SPAC to buy?  You can just buy the SPAC of SPACs.  Or the ETF of SPACs.  Maybe someone can come up with a way to package more acronyms together into an investment and sell that.

Investment giant SoftBank may launch a SPAC.  Same with several hedge funds.  These are investment entities with access to practically unlimited funding.  Raising cash for investments is not a problem for them so why do this?  Because it makes business sense.  This isn’t about the underlying investment, it’s about making money for the management team.  These firms can raise just about as much money as they want and earn a handsome fee (and if the investment actually works, that’s gravy) just by riding the hype train.  When things reach this point, it’s generally not in investors’ best interests.

Explosion of assets

While it doesn’t guarantee failure, massive flows into a narrow sector or investment product structure tends to precede trouble.

What’s the Most Successful SPAC?

With all the hype around SPACs there should be one or two big-time success stories to push potential investors over the goal line.  So what’s the most successful SPAC?  How about this: just name a SPAC from before 2019.  It’s tough, right?  I couldn’t find any definitive answer, but Burger King (now Restaurant Brands International) might fit the bill.  Burger King bounced between big investment banks for a while – going private then public – before a SPAC bought 29% of them.  They later merged with Tim Horton’s and moved to Canada.  Yes, the sexiest SPAC story I could find is flame-broiled.  Is this what SPAC investors can expect if everything goes right?  That seems anti-climactic.

My Take

SPACs seem to exist more as a vehicle for executives to add optionality to the end of their careers.  They only have to commit to two years.  If nothing happens, they lose time.  If the business takes off, they have significant ownership stake and can ride off into the sunset.  On the other hand, there seems to be more downside for investors than upside.  The previous round of SPACs fell flat.  A Bloomberg article from November 2017 found that 58% of SPACs that went public since 2015 were still seeking a merger and 29% of SPACs since 2003 had been liquidated without an initial deal.  This might be a fun diversion for some mad money, especially if your favorite hedge fund personality is involved.  Maybe you are active on Draft Kings or like the idea of space travel.  As with most investment fads, the deck is stacked in favor of the group creating the investment product.  It is not something that investors NEED in their portfolio, though.