SPACs – An asset class that puts small investors last

Special Purpose Acquisition Companies (SPACs) are shell companies that attract investors and then go public in order to merge with a specific start up, thereby taking the start up public.

A real problem with SPACs is preferential treatment for institutional investors. Institutional investors actually get a money-back guarantee. If an institutional investor doesn’t like the company the SPAC is acquiring, they can ask for their entire investment back. The individual investors do not get this right.

Performance-wise SPACs do not hold what they promise. In fact, they have entered a full-blown downturn. About 60% of the 146 SPAC mergers announced since the start of the year are currently trading below their initial public offering price. Shorting SPACs has become more popular, according to data from S3 Partners. The main SPAC exchange traded fund, the Defiance Next Gen SPAC Derived ETF (SPAK) hit a high of $35.08 per share in February. Since then, it’s dropped more than 28%. The IPOX SPAC index shows a loss of around 20% since February. By comparison, the S&P 500 has gone up 11.5% this year. SPACs haven’t even come close to living up to their hype. They’ve underperformed the Russell 2000 by 10% or worse every year since 2010.

SPACs will be around for a while. They appeal to founders seeking a quick public listing, to institutional investors who like the built-in money back guarantee and the small investors who can invest in so-called hot companies.

But the private stock investors should look past the hype to see SPACs for what they really are: an asset class that puts them last.

Sven Franssen