Professional Investors and the SPAC boom: Proceed with Caution
As an investor, you pride yourself on your ability to rationally assess a startup’s potential for market success. You dig into the company’s fundamentals and you think long and hard about its business model. You mix this with your knowledge of the market, a dash of intuition and decide if the risk matches the reward. In short, you’re a skilled individual who knows what they’re doing when it comes to important numbers.
That’s what sets you apart from the average gambler. After all, if it weren’t for the experience and know-how you bring to your investment decisions, you might as well go and throw your money into a slot machine at the casino.
Or pour it into some trendy SPAC, perhaps?
We probably don’t need to explain the terminology to you — not when SPACs have been so much in the news of late — but here’s a quick reminder.
SPAC stands for Special Purpose Acquisition Company. This is a company with a two-year lifespan, whose sole purpose is to buy out private companies that want to get ‘public money’ fast.
According to an article in the Harvard Business Review, SPACs raised $83 billion in 2020, a sixfold increase on the previous year. The weight of the boom is clear from the fact that this figure nearly equaled the amount raised by IPOs. And in the first part of 2021, the trend is only gathering pace.
There is no shortage of amateur investors
As people take time out to rethink pretty much everything during the pandemic, during which they can’t spend money on holidays, it’s no wonder that there is no shortage of amateur investors looking at options like SPACs. Add a couple of success stories (like Clarivate Analytics, Lucid Motors and DraftKings) and the fact that many sports and business celebrities (Shaquille O’Neal, Alex Rodriguez) are backing their own SPACs, the public interest comes as no surprise. You might also remember recently big stories of the German electric air taxi developer Lilium and the US electric car maker Fisker.
(The fact that millions may be feeling they have ‘missed out’ on their chance to win big with Bitcoin may also have played a role here.)
A glorified form of gambling
But it’s hard not to see this as a glorified form of gambling. When you put money into a SPAC, you’re not putting it into a business on which you can do due diligence.
As a person with investment skills most people don’t have, you’re essentially letting somebody else make your investment decisions!
Decisions they may be forced into by a SPAC’s artificial lifespan. There may be good arguments for this when it comes to average people investing some of their cash as a hobby, but we think it’s hard for you as a professional investor to justify getting involved. You should be above all of that.
As Heather Perlberg tellingly writes in Bloomberg Businessweek:
‘Fund managers say some SPACs are betting on companies that not long ago were struggling to raise money from risk-loving private investors.’
If that’s not reason enough to stick to your strengths, consider that most SPAC share prices actually fall after their mergers. A few people have indeed gotten rich fast, but this may not actually be a boom based on anything other than the resultant hype. Goldman Sachs Chief Executive David Solomon was quoted in the Financial Times as saying that it’s ‘not sustainable in the medium term’.
SPACs are attracting plenty of negative press in recent weeks — and now they’re getting attention from the regulators too. While big Wall Street names and huge institutional funds may still have their reasons to be getting involved, that doesn’t necessarily mean you as a serious private investor should be doing the same.
Any investment is to some extent a gamble — but a calculated one.
Taking yourself out of the decision on where your money goes is a lot like throwing dice. Is that what you as a professional investor really want to be doing?
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