SPACs, or special purpose acquisition companies, have already broken their 2020 record by raising $87.9bn so far in 2021.
A SPAC (also known as a blank cheque company) is formed to help raise money and take another company public through a merger. Investors in SPACs range from private equity funds to the general public. SPACs have two years, give or take, to complete a deal and, if no deal is made, the money is liquidated and returned to the investors.
A perfect example, hot off the press, is the SPAC Holicity [HOL] taking Astra (pictured above), which has ties to NASA, public. Astra has a pipeline of $1.2bn in contracts, mainly for observation satellites that also send data to autonomous vehicles. NASA plans to make daily runs to space. This is all part of the space revolution I wrote about in November 2020.
Whether your interest is in space, electric vehicles, blockchain technology, healthcare, or pretty much any megatrend, there is most likely a SPAC to look at. But keep in mind that SPACs have no commercial operations, make no products and do not sell anything. You are buying into an interest-bearing trust account until the SPAC team finds a private company looking to go public with an acquisition. Once that acquisition is complete, investors can swap their shares for the merged company or get their investments back with interest.
Some SPACs have paid off handsomely, as in the case of Fortress Value Acquisition Corp [FVAC], which served as a blank cheque company in a merger with Mountain Pass [MP]. Mountain Pass owns and operates integrated rare earth mining and processing facilities in the U.S. We bought that SPAC in August 2020 and sat for three months until such time the announcement came MP would be traded on the NYSE. Our entry price was $11.30. It now trades at $45.00. We bought the SPAC and had patience because we strongly believed that rare earth minerals, especially those produced in the United States, was a sound investment.
SPACs are not without some sticking points. One caveat is that target companies run the risk of having their acquisition rejected by SPAC shareholders and, since the due process is less rigorous than a traditional IPO, investors are literally going in blind.
In February, articles began to appear stating that the SPAC bubble is about it burst. One source claims anything that creates this level of frenzy is bound to fail. Many firms taken public by SPACs have no real business plan or revenue, and in some cases they face shareholder lawsuits by disgruntled investors, as in the case of Nikola.
Nonetheless, the takeaway is that you should do some of your own due diligence to understand the SPAC’s intentions, the type of industry it hopes to merge with — is it big tech and therefore interest rate sensitive, or a megatrend and if so how far along? You should also understand funding and the due date for when it must gain approval or be liquidated (in that two-year span).
We have done our due diligence on another hot SPAC called Fintech Acquisition Corp V [FTCV]. They have a merger agreement with trading platform eToro, in a $10.4bn deal. Here we have predictions of outsized growth, excellent management and big backing. That said, there is also a claim against it, suggesting that it breached is fiduciary duty to its shareholders by failing to conduct a fair process that resulted in the dilution of ownership interest.
With all the activity in SPACs unlikely to slow down anytime soon, this is a super exciting place to look for investment opportunities. Beware, of course, that these can be highly speculative and not everything is as it first appears.