SPANX and SPAC’s…one you might know a thing or two about (helloooo and welcome back waistline) and one might be the equivalent of what SPANX were to you back when they first appeared in women’s lives (I keep hearing this term…what is it?)
SPAC’s (Special Purpose Acquisition Companies) are being talked about more often, so you may be hearing more about them in the coming quarter and year. You may have heard this term mentioned by someone you know – pay careful attention for yourself, your sister, Mother, Grandmother and best friend because these are not for average (retail) investors.
Why are SPAC’s seeming to suddenly appear in the investment arena? Technically, they have been around for 20+ years back when we were belting out I Will Always Love You by Whitney Houston and My Heart Will Go On by Celine Dion in the ‘90s (ok guilty, I still belt it…when I’m alone, of course).
Coupled with the IPO (Initial Public Offering) process being volatile the last few years, a growing and increasing stock market, extremely low interest rates and a desire by the public to look at equity/growth investments, SPAC's have refined and emerged as attractive. In fact over 65 SPAC's went public in 2020 raising over $22.5 billion, which accounted for approximately half of total IPO volume in 2020.
What exactly is a SPAC?
As an example, think of the SPAC as a cocoon looking to become a butterfly… the cocoon is filled with cash which it will hope to spin into a merger with a business and into a publicly traded company within a 2-year timeframe. Some current SPAC's include an investment focus on industrials, cannabis, ESG and things related to future transportation and electric vehicles; sports betting, financial-technology and businesses in online gambling, with attention growing in real estate and insurance.
Some stocks you may recognize started as SPAC's include Virgin Galactic Holdings, Nikola and DraftKings. Currently shortages of SPAC's in biotech and technology seem to also be attracting attention.
A word of caution
Because the SPAC is complex, and should be treated with caution, an individual (retail) investor needs to commit to doing serious study! Wrapped inside a SPAC is a lot of financial terminology and concepts that are in evidence throughout the investment world. To be successful, you will need to understand working definitions of: incentives, sponsors, “promote”, redeem, dilution, section 11 liability, rights & warrants, prospectus, PIPE (Private Investment in Public Equity), forward-looking projections, 1933 securities act, etc.
And that’s just for starters...
Many financial experts do not feel SPAC's are a practical way for individual (retail) investors to make private-equity-like investments without paying the fees associated with private equity funds. One thing to keep in mind is that it is typically hedge funds that are the major investors of SPAC's (approximately 85% of SPAC investors are institutions).
To sum up,
I’ll play the role of your big sister…and tell you the absolute truth when you ask me to tell you how you look…
- The SPANX look great and
- Do a little more research on the SPAC’s before you pull the trigger – they may be (a lot) more complicated than what appears on the surface
PS. Shout out to Sara Blakely, the founder of SPANX, and who encourages us to elevate ourselves and others – a true SISTER
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