Two Names to Consider in the Trendy World of SPACs

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Special Purpose Acquisition Companies (SPACs) are nothing new. They have been around since the 1980s, but only recently have only recently come to the attention of most investors. In the past, they have usually been seen as a slightly dodgy, fringe area of the investing world, which makes sense given that they started in the 80s, the era of Gordon Gekko and Jordan Belfort. They were known as “blank check” investments because investors were handing over their money for nothing more than a promise to invest it somewhere useful. Understandably, that made them unpopular with financial advisors, so until quite recently, very few people outside of Wall Street had even heard of them.

Right now, though, they are all the rage.

Their popularity is down to a combination of things. There is a lot of money sitting on the sidelines still looking for a home, despite, or maybe because of, market highs. Those highs and the associated high multiples that look detached from economic reality are driving that money into riskier assets. Young companies are also attracted to the fast track that going public with a SPAC merger offers, just as there is a slowdown in the traditional IPO market.

So, should you, the retail investor, be considering them, and if so, which ones in particular?

There have been some big successes. For example, Tortoise Acquisition Corp. (SHLL), turned $10 into around $40 after they announced that they were buying Hyliion, a company that provides electric drivetrains for trucks, or DiamondEagle, that merged with Draft Kings (DKNG).

The same group that sponsored DiamondEagle, however, also brought us Golden Eagle Acquisition, which became Global Eagle Entertainment (ENT) after merging with an inflight entertainment business, just before everyone gave up flying. That company is now bankrupt.

It is sometimes said that because SPACs are liquidated should they not find a merger target and because typically 90% of the money raised is held in trust while the search for that target takes place, SPACs offer a limited downside with good upside. The example of ENT, however, shows that isn’t always true. You are depending on the people involved to their due diligence and make a good decision.

Because of that, the two most important things to consider if you are considering in investing in a SPAC are who is controlling the money and where they are looking for targets (or “partners” as most in the business would rather say).

Sponsors range from well-known investors such as Bill Ackman, who is responsible for Pershing Square Tontine Holdings (PSTH.U), through industry specialists such as those behind Dragoneer Growth Opportunities (DGNR.U), a SPAC focused on tech with an impressive cast of successful industry CEOs and investors as directors.

Then there are the novelty offerings; things like the Moneyball guy Billy Beane’s RedBall Acquisition (RBAC.U), a SPAC that is looking for a sports team, most likely a European soccer team, to merge with.

The hottest SPACs recently have been those focused on the EV space, but, as much promise as that field shows, the fact that so many have already gone to market, either directly or through the SPAC merger route, makes me somewhat cautious. There are opportunities for disruption and big growth, but then, that is also true of other areas of tech that haven’t been worked as hard by SPACs, so I would prefer to look there.

Whatever the target industry, one of the potential problems with SPACs is that, because they have a limited time (usually 2 years) to find a suitable partner company, there can be pressure as time runs out to do a deal, any deal, rather than just take the loss associated with liquidation.

Again, the best way for potential buyers of a SPACs units (A “unit” is one share but usually also includes a warrant, the right to buy a fraction of another share at a pre-set price) to guard against that is to consider the history and reputations of its sponsors, the people who formed it and sold the units.

So, with all that in mind, my preference right now would be two SPACs that are headed up by people with strong reputations to protect and which are looking in the broad tech space.

Societal trends suggest that within tech in general, fintech and healthcare tech could be explosive areas before long. Dragoneer is looking in those areas specifically and has people like Sarah Frier, the former CEO of Square (SQ) behind it, so would be one that fits the bill.

The other would be PSTH.U, with Bill Ackman at the helm and an extraordinary amount of available cash, $5 billion, to work with.

If you are looking at SPACs, you should always be aware that even the most carefully thought-out investment in this area is extremely risky. You are still trusting in someone else’s judgement, with no guarantee that they will ever find a suitable vehicle for investment.

Add in the risk of a dud, and you can see that SPACs aren’t for everyone. If, however, you do want to take a chance with a small portion of your assets on something like this, DGNR.U and PSTH.U are worth considering.

*Disclosure: The author intends to take small positions in both DGNR.U and PSTH.U in a personal account, and may have done so by the time you read this piece.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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