Alternative Investments

Special Purpose Acquisition Companies Are Set to Have a Record 2021

In the October 2016 issue of the Journal of Accounting and Economics, Lora Dimitrova, Ph.D., dubbed special purpose acquisition companies (SPACs) “the poor man’s private equity funds.”

I don’t see this as a dig. I see it as an opportunity.

We all know that being early investors in companies before they go public can lead to enormous returns.

But the private equity market is largely for accredited investors, meaning the average Joe can’t participate. And to make matters worse, companies are remaining private for longer. This is a double whammy for retail investors who find themselves locked out of the most lucrative areas of the market.

This is where SPACs come in.

These blank-check companies go public with no significant operations. And once they’re armed with wheelbarrows of cash from their initial public offerings (IPOs), they typically have two years to merge or acquire the next great disrupter or innovator.

Now, SPACs aren’t new. But the heightened interest in them is a recent development.

From 2003 to 2016, SPACs raised roughly $31 billion. And in the years leading up to the financial crisis from 2007 to 2009, SPACs accounted for more than one-third of U.S. IPO volume.

But after falling out of favor for several years, SPACs have returned with a vengeance.

NYSE and Nasdaq IPOs

In 2020, SPACs raised a record $83 billion. And there were 238 SPAC IPOs, a fourfold increase from the previous record in 2019.

Interest shifted into overdrive after DraftKings (Nasdaq: DKNG), Nikola (Nasdaq: NKLA), QuantumScape (NYSE: QS) and other headliners went public via SPACs last year. I mean, beyond Nikola, 26 electric vehicle companies merged with SPACs in 2020.

But we haven’t hit a peak yet. Last year’s SPAC record will undoubtedly be surpassed in 2021. In fact, it would be nearly impossible for it not to be at this point.

In just the first two months of the year, 188 SPACs went public, raising $60 billion. And they’re on the hunt for the next big thing.

The retail investor – Dimitrova’s “poor man” – sees SPACs as an opportunity to access a market they’ve long been locked out of. And though SPACs aren’t without their controversy, merging with the right disrupter can mint investors a fortune. We don’t need to look much further than the 1,000% return QuantumScape rewarded investors with last year.

So investors should make some space for SPACs in their portfolios. But, as with any opportunity, don’t just gobble up shares willy-nilly. Do your due diligence and then some.

Here’s to high returns,

Matthew

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