What's The Deal With SPACs?
Updated: Feb 23
Let's talk about SPACs, they are Special Purpose Acquisition Companies and they are used to raise money from sophisticated investors to purchase a private company at a premium and take them public. It's less traditional than an IPO, and it has taken off in 2021 with more than 3 SPACs per day being launched since January 1st.
So why are investors putting their money into SPACs? A SPAC raises money from investors before even selecting which company it plans to acquire, so how do investors know how much money to raise? Well, they don't care. Here's what's happening:
Here's What's Happening
Investors are putting their money into SPACs because the equity markets have left little room to grow as asset prices are reaching their peak. So SPACs give sophisticated investors a place to invest their money with above market returns. It's one of the few areas that still has a high probability of successful positive returns, as opposed to the equity markets as a whole which are growing more and more unstable. Since SPACs acquire their companies at a premium, it generates a surge of momentum trading around the stock, at which original investors in the SPAC can sell for a remarkable return. Retail traders are often left holding the bag of whatever is left, and some of these companies being purchased by SPACs aren't worth their salt.
And there really aren't that many places left to invest within the equity market. It's pretty tapped out to the average investor, but investors with access to more money can invest in riskier assets (such as SPACs), then sell it to retail investors for a massive profit. Retail investors might be able to catch the tail end of the momentum swing and capitalize on a smaller gain, but the sharks will always eat first.
To the average investor, investing in SPACs after they go public is a really risky decision, and probably not worth the potential gains it may make. The original investors of the SPAC that are able to buy shares before it goes public are going to receive the greatest returns, and investing in the SPAC after that point is futile and dangerous. I'd rather play roulette.