What Are SPACs, and Why Is Everyone Talking About Them Right Now?
Wall Street thought 2020 was the Year of the SPAC, or special purpose acquisition company (SPAC).
Turns out, this title was premature.
We’re not quite three months into 2021, and yet U.S. SPACs have already raised more money than the record $83.4 billion that was raised in all of 2020.
So what exactly are SPACs, and why have they become so popular all of sudden?
Also known as blank check companies, SPACs are companies that have no explicit business plan other than to acquire or merge with an unspecified private company at some point. They’ve been around since the 1990s but haven’t drawn a whole lot of investor attention until recently, for reasons I’ll get into later.
The Basics of SPACs
The way SPACs work is, they list on an exchange like the New York Stock Exchange (NYSE) and then typically have up to 24 months to acquire a target company. If a deal isn’t made by the two-year mark, they must dissolve and return the gross proceeds to shareholders.
One of the most well-known examples is Virgin Galactic, which began trading under the ticker SPCE in October 2019 after merging with Social Capital Hedosophia, a SPAC founded by venture capitalist Chamath Palihapitiya.
Since SPACs don’t make anything or own any assets, it’s the founders that are the main draw. Think Palihapitiya, an early Facebook executive, outspoken advocate of bitcoin and potential California gubernatorial candidate. Other SPAC sponsors have included big names such as Bill Ackman, Shaquille O’Neal and former House Speaker Paul Ryan. Investors may bank on founders having the right connections to close a deal with a hot tech startup and bring it to market.
In other words, it’s a case of betting on the jockey (the founders) rather than the horse (the company).
Again, SPACs were once quirky backwaters in the $50 trillion U.S. stock market. The NYSE didn’t bother listing any until May 2017. Just five years ago, Goldman Sachs had a strict policy against them.
Flash forward to today, and junior Goldman bankers are issuing complaints of grueling working conditions due to the boom in SPAC issuances. A survey of first-year Goldman analysts showed that many have been working 100-hour weeks on average since January. “My body physically hurts all the time and mentally I’m in a really dark place,” one respondent wrote.
An Alternative to Traditional IPOs
When it comes to tapping public markets, the trend is definitely in SPACs’ favor. Last year, 248 SPACs listed, a record, compared to 209 traditional initial public offerings (IPOs). To my knowledge, this is the first time SPAC issuances outpaced IPO issuances. The amount of cash raised was also a nearly one-to-one ratio.
This hurts retail investors, who never get to participate in a company’s meteoric rise from nothing.
For many investors and executives, SPACs can be seen as a “loophole” of sorts, allowing companies to get a public listing without going through the more typical channels. I don’t know if I would agree with that term, but I wouldn’t be surprised if regulators start to crack down on these types of transactions.
Inflation Concerns at a Record High?
Switching gears, I learned last week that Google searches for the keyword “inflation” hit their highest level this month since at least 2004, when the online search giant began collecting information. This tells me that people are starting to get concerned with the direction consumer prices are headed in, and how this will affect their pocketbooks and investments.
The consumer price index (CPI) rose 1.7% year-over-year last month, but as I’ve said before, is the CPI “fake news”? This measure doesn’t include food and energy, and yet those are the goods and services seeing some of highest inflation right now. Grocery prices increased the most in nearly a decade last year, and this rate could surge even more this year as shipping rates go up. In February, the cost to export from the U.S. jumped 5.2% over last year, the most since June 2018, while import costs rose 3.0%.
This, coupled with rising commodity prices, is having a huge effect on big-ticket items like cars and trucks. According to the Manheim Used Vehicle Value Index, wholesale prices for preowned automobiles increased a jaw-dropping 23.7% from March 2020 to today. Like I said recently, if you’re in the market for a new car, you might want to lock in today’s prices before they go up any more.
Last week, Federal Reserve Chair Jerome Powell said he expects the U.S. economy to grow 6.5%, which would be the most in almost 40 years. Even if this results in higher-than-normal inflation, Powell committed to continue high-growth monetary policies, including near-zero rates and asset purchases.
That said, I think gold is a prudent investment to help stem the impact of inflation on your portfolio. I often advocate the 10% Golden Rule, with 5% in gold bullion (bars, coins, jewelry) and 5% in gold mining stocks, mutual funds and ETFs.
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The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns. The Manheim Used Vehicle Value Index is a measurement of used vehicle prices that is independent of underlying shifts in the characteristics of vehicles being sold. Statistical analysis is applied to its database of more than 5 million used vehicle transactions annually.
Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of (12/31/2020): Facebook Inc.