Smacked by SPACS?

[Markola]

I read how SPACS are forming at a record pace lately:

https://www.cnbc.com/2021/01/25/par...ose-low-risk-to-the-sp-500-goldman-says-.html

My reaction was, “What in the Devil is a SPAC?” so I looked up the definition.

https://www.businessinsider.com/what-is-a-spac

Basically, any investor, accredited or not, buys a share of a publicly traded zombie company and then waits years for the management to find and buy a private company, converting it into a public company.

What could possibly go wrong?! Conservative, buy and hold index fund investor that I am, I’m still fascinated by the riverboat gamblers out there who see such fads and say, “Hold my beer!”

 

[dunkelblau]

This part of recent events seems to rhyme more with three centuries ago rather than one:
https://en.wikipedia.org/wiki/South_Sea_Company#Top_reached
One famous apocryphal story is of a company that went public in 1720 as "a company for carrying out an undertaking of great advantage, but nobody to know what it is".

Of course things are different now. While the South Sea Company rose tenfold in a single year and "caused a country-wide frenzy", a similarly performing investment since March 2020 would today be considered a "dud" in some circles. Over the years my penchant for falling knives got me into many names that gradually dropped to near zero, and many of these seemed to breathe new life since Halloween, although who knows for how long? One of the steepest jumps was a position valued at $68 in my January 2020 statement and at this moment lists at over $60k (it had hit >$100k earlier this morning). Since these dead dogs all started barking at around the same time, I imagine the SPAC angle must be driving their share prices.

I think we all know how this story will end.

 

[UnrealizedPotential]

What is the difference between CMGI of the late 90's and SPACS? They seem similar to me in some ways. Of course CMGI failed and today goes on under another ticker but with a completely different objective. CMGI back then was known as an incubator, investing in start ups that it would bring to market I think.
Maybe I have it wrong, but it seems the same to me, so I am leery.

 

[njhowie]

SPACs, and their cousins, "blank check companies" exist as simply another means for Wall Street to separate naive investors from their money.

The key function of the SPAC is to provide a path for private companies (which the SPAC acquires) to go public without the vetting which underwriters provide during the IPO process.

Formation of the SPAC is usually just as underhanded. Management goes and acquires some zombie company with a dormant stock listing. Then they change the name/symbol and play some financial shell games. All of this is done to avoid regulatory processes that are in place.

 

[OldShooter]

This is not really a new idea. 20-30 years ago they were called "blind pools" locally and were not public. You did have to be accredited to buy in. I bought into two or three that were set up by people I knew very well and who had their own skin in the game. One was a grand slam home run, one 20+% IRR, and one ~10% IRR (roughly, it's been a long time). I'd guess that compensation for these SPAC creators will be egregious but I'm not interested in digging through prosectuses to find out.

Really, these can be looked at as high-fee closed-end mutual funds that invest in private equity. Not my cup or tea but hardly revolutionary or some kind of evil plot.

 

[ncbill]

Sounds like a good thing to start and take a high salary from (plus a percentage of funds raised) but not something in which one should invest.

 

[Markola]

There is so much capital sloshing around the world looking for a productive home right now, I guess to some it makes sense to buy shares in a zombie company looking to buy another company TBD and await the IPO-like riches. YMMV.