SPAC Attack - Adviser Investments

SPAC Attack

October 14, 2020

In this issue:

SPAC Attack

Start-up CEOs dream about their initial public offering (IPO)—that day when they can step up and ring the opening bell at the NYSE and (they hope) watch their company’s stock rocket up in value. In 2019, however, several of those rockets turned out to be duds for everyday names like Uber, Lyft and WeWork. Add to that the uncertain and far-reaching long-term business implications of the COVID-19 pandemic, and for many start-ups, achieving that IPO dream has become a nightmare.

Wall Street, however, has ridden to the rescue: Enter the SPAC.

Special purpose acquisition companies (SPACs) are shell companies created by one or more founders, often sophisticated investors themselves. Once created, SPACs conduct an IPO in order to raise capital by selling shares in the shell company. The SPACs’ leaders then use that capital to acquire or merge with a private company. And voilà, the private company becomes a public one without having to conduct its own IPO.

Given the volatility markets have experienced in 2020, private companies have been more eager than ever to accept the helping hand offered by SPACs. Eighty-six SPACs have raised a record $33 billion in capital through August 2020, up 260% from the same period last year. That includes the $4 billion raised in July by hedge fund billionaire Bill Ackman for his SPAC, Pershing Square Tontine Holdings, Ltd.—the largest SPAC to date. Companies that have used SPACs to go public include online sportsbook DraftKings and electric-car manufacturer (and Tesla rival) Nikola Corp., with lifestyle brand Playboy set to join the club this month.

It’s safe to say that SPACs have grabbed investors’ attention, but there’s a reason they’re known as “blank-check” companies: For a SPAC to pan out as a worthwhile investment, the speculative investors who run it need to pick a winner to merge with and help guide it to success.

For us at Adviser Investments, the “blank-check” nature of SPACs is reason enough to be wary. Once a SPAC has real business and reports real earnings, then it’s possible to decide if the company is worth the investment. Before that? It’s mostly a guessing game. You don’t know what type of company is going to merge into that empty shell—or if you do, you don’t have enough information to make an educated assessment of its future potential since the financial metrics won’t be made public until after the deal is done.

Startups and their backers may be eager to escape the public scrutiny of their balance sheets prior to a traditional IPO, but we’d argue that investors should not be eager to follow their lead.

 


Podcast:
The Muni Market and COVID-19

Municipal bonds (munis)—central to the services and infrastructure that keep our cities and towns running—get neither the respect nor the attention they deserve. You only see them in the news when something goes wrong. And, well, municipal bonds are back in the news now, as investors worry over how the budget pressures state and local governments are facing from COVID-19-related cutbacks will impact their portfolios.

Join Director of Research Jeff DeMaso, Senior Vice President Chris Keith and Research Analyst Jen Zebniak as they explain the critical role municipal bonds play in many income-oriented portfolios, and how they’re investing in these essential tax-exempt securities under challenging circumstances.

In this engaging conversation, Jeff, Chris and Jen discuss:

  • Potential opportunities and which types of munis to avoid
  • The effect of federal government relief on the municipal bond market
  • How local governments weathered previous recessions
  • … and much more

Listen in for our team’s take on how investors should approach munis in the time of COVID-19 and the fledgling economic recovery. Please click here to listen now!

 

Vanguard Shakes Up Its Money Markets Fund Lineup

Vanguard announced several changes to its money market fund lineup recently.

It will be closing and liquidating its New Jersey Municipal Money Market Fund and its Pennsylvania Municipal Money Market Fund in November.

The Malvern, Pa.-fund giant stated that the move was due to a lack of high-quality securities. We note, however, that outflows had reduced assets in the New Jersey fund by 13% over the past 12 months, while the Pennsylvania fund had dipped 7%.

In addition, Vanguard announced on Sept. 28 that it was changing the mandate of its Prime Money Market Fund to make it a “government” fund, and it now is required to invest at least 99.5% of assets in government-issued securities. The fund has been renamed Cash Reserves Federal Money Market Fund to reflect the new strategy.

In all three cases, the changes are another ripple effect of the Federal Reserve dropping base interest rates to zero. Only residents of the state in question are able to take maximum advantage of the benefits of state-specific tax-free muni funds, and such funds generally offer lower yields than alternatives like corporate bonds. With government bond yields plunging, their tax advantages become less compelling. (Some experts have even called state-specific muni money markets an endangered species; as a group, these funds hold only $34 billion in assets today, down from $152 billion in 2008.)

And in an interest rate environment where many money market funds are being compelled to waive fees in order to keep yields positive, the slightly higher expense ratio of Vanguard’s Prime Money Market Fund was too high to sustain. By taking on a new mandate, the fund may survive this latest chilling encounter with zero, but you can bet many money market funds won’t.

 

Adviser Investments’ Market Takeaways

Calm and clarity have been sorely lacking when it comes to market news recently—that’s why we’re providing Today’s Market Takeaways, short videos in which a member of our investment team analyzes what the market is telling us.

Recently, Research Analyst Liz Laprade spoke about Apple’s new iPhone and what it might mean for profitability at the tech giant, and Vice President Steve Johnson reflected on the market’s rally last week.

 

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