March 18, 2021

Recent financial headlines have covered the exponential growth of SPACs. Is this an investment worthy of a long-term investor’s money?

SPACs (Special-purpose acquisition companies) have been around for over 30 years and have become immensely popular recently. CNBC recently called SPACs “one of Wall Street’s hottest trends.” How a SPAC works is a SPAC raises money through an IPO (Initial Public Offering) for the purpose of finding a private company to merge with. This process normally takes about 2- years. Investors in the SPAC do not know what company the target for the merger is. After completing the merger, the investors in the SPAC will own shares in the new company. SPACs have been marketed through the press and by high-profile sponsors like Alex Rodriquez and Shaquille O’Neill. Recently, DraftKings Inc. (DKNG) became a publicly traded company by merging with a SPAC.

Although the media has highlighted the few successful SPACs like DraftKings, they are the exception. According to a study completed at the Harvard Law School Forum of Corporate Governance titled “A Sober Look at SPACs,” investors that hold shares through a SPAC’s merger have seen share prices drop on average by a third or more. This study looked at all acquisitions completed by SPACs from January 2019 and June 2020. ¹

The reality of investment returns generated from SPACs is quite different from the hype in the media and online. Sponsors of SPACs and the acquired companies are rewarded handsomely for this process but more often than not the investor that buys into the SPAC ultimately pays the price without much of a return and often with an overall loss.

If an individual investor is interested in a SPAC, the details should be looked at very carefully and extreme caution should be observed. At Prato Capital, we believe investors who look at SPACs in detail will say “What the SPAC?” and move on to better investments.

 ¹ “A Sober Look at SPACs”, Posted by Michael Klausner (Stanford University), Michael Ohlrogge (NYU), and Emily Ruan (Stanford University), Harvard Law School Forum on Corporate Governance, November 19, 2020, https://corpgov.law.harvard.edu/2020/11/19/a-sober-look-at-spacs/