The Special Purpose Acquisition Company (SPAC) juggernaut is storming into 2021 to raise more than $ 45 billion without delay.
“The front of these SPACs is exploding. January, February will be the biggest months ever for those front-end SPACs,” JMP Securities CEO Mark Lehmann told Yahoo Finance Live. “I’m just warning the general public, this GameStop fever will unfortunately probably blossom a bit in the spaces.”
Lehmann said investors can find great opportunities in SPACs as these blank check companies raise capital to acquire private companies. But “like any other investment, you have to do your homework, you have to make sure you invest in good businesses and invest in good management,” he said.
With SPACs, this can be said more easily than done. A recent note from Jared Woodard, investment and ETF strategist at Bank of America Securities, warns investors are “desperate for returns” helping lift SPACs to new highs.
“In 2020, SPACs raised $ 106 billion in funds, five times the previous peak ($ 19 billion in 2007) and more than the total of the last ten years. Recent market volatility has had no deterrent: the number of SPACs offers in January alone exceed the last six years together, with 2021 underway to set a new record, ‘Woodard wrote.
Bank of America data indicates that individual investors account for 40% of all trading in SPACs, compared to only about 20% of the activity in S&P 500 and Russell 2000 shares.
But Woodard points out: “Unfortunately, after the acquisition, SPAC returns far lagged behind both the traditional stock exchanges and the broader market. Since early 2019, the 30 largest SPACs have lagged behind the 30 largest traditional IPOs by 69 dpi.”
Bid big on SPACs
The Churchill Capital Corp IV (CCIV) SPAC has jumped 30% over the news that it is about to sign a deal to acquire a luxury motor vehicle manufacturer Lucid Motors Inc. Yahoo Finance has reached out to Churchill Capital and is awaiting comment.
Andy Serwer, Editor-in-Chief of Yahoo Finance, recently investigated the SPAC madness and quoted Stanford Law Professor Michael Klausner’s study “A Sober Look at SPACs”, which found: “SPAC investors holding shares during the merger of a SPAC, see after the merger the share prices fall by an average of a third or more. ‘
The Woodard of the Bank of America points out: ‘By design, early investors have no idea what the ultimate acquisition goal will be; they have the option to redeem SPAC shares for a return on the principal amount before completing an acquisition, but still bear credit risk and the opportunity cost during the period prior to the acquisition. “
And after a SPAC acquires a company, Woodard warns that ‘indulgent rules’ could cost individual investors a lot of money. “One study found that the hidden fees and costs are so large that for every $ 10 raised in a SPAC IPO, less than $ 7 in cash is left by the time the average SPAC achieves a target. Sponsors may also negotiates with large or influential investors privately and offers more favorable terms without disclosing it to the rest of the investor base. ‘
However, Lehmann said investors can ‘make a lot of money because [SPACs are] not a one trick pony. ‘He points out that there are’ amazing companies raising capital to find large private companies. ‘
Woodard recommends that “the desperation of investors to chase empty check companies could be a contradictory indicator” as the S&P 500 fell 58% and 22% to previous peaks in the SPAC, 2007 and 2011 issues. “
Adam Shapiro is co-anchor of Yahoo Finance Live from 3pm to 5pm. Follow him further Twitter @Ajshaps
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, Youtube, en reddit