Home Guides & Resources chevron_right Investing Your Question Answered: SPACs’ Surge Explained Published April 19, 2021 Josh McCourtEquity & Quantitative Research Analyst This week’s reader question is about special-purpose acquisition companies: SPACs aren’t new, so why are they so popular now, and is this a bubble? Josh McCourt, EquityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. and Quantitative Research Analyst, had this to say: That’s right, SPACs (special-purpose acquisition companies) are not fresh on the investment scene—they’ve been around since the ’90s. But they returned to center stage last year, raising billions of dollars and making a media splash with big-name institutional underwriters and celebrity sponsors. These so-called “blank check” companies are a type of shell corporation. A SPAC has no business yet it conducts an initial public offering (IPO) to raise cash, and then looks for a private company to acquire. If the SPAC doesn’t find a company to buy within a set timeframe, investors get their money back. If it completes a buy, then the private company becomes a public company, and shareholders of the SPAC now own the new entity—which takes the money in the SPAC and (hopefully) uses it to fund growth. Why are SPACs so popular right now? Some of the surge can be explained by market conditions. Pandemic-fueled volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in. made it more difficult for companies to go public via a traditional IPO. Going public through a SPAC vastly simplifies the process, with quicker closings, lower costs and fewer regulatory requirements compared to a traditional IPO. On top of that, there’s a FOMO (fear of missing out) aspect in play. Headlines touting splashy SPACs—including online betting company DraftKings and payment firm Paya—have raised their profiles and made SPACs seem like a compelling investment for retail investors who have little to no access to the IPO market. Some of the SPACs out there may turn out to be decent investments, but we consider the current market for them to be a bubble. What’s more, SPACs are highly speculative—you are trusting the sponsor to make one good (ideally great) investment bet when it merges with a private company. SPACs themselves tend to trade around their (almost always) $10 listing price until a merger has been confirmed. After that, the sponsors exit and prices often fall below $10, leaving investors holding the bag. Despite the trend, SPACs have already raised more money in 2021 than they did in all of 2020. They’re also raising eyebrows at the Securities and Exchange Commission, Wall Street’s federal watchdog, which warned that some companies may need to restate their financial results due to questionable accounting practices. SPACs have come under increased scrutiny from lawmakers as well. Speculation aside, any investment entails understanding what you own, how it’s valued and who is steering the ship—with a SPAC, virtually all of those questions remain unanswered until it’s too late. Caveat emptor! Ask Us a Question! We’re always interested in the topics or concerns you might like us to comment on. As much as we try to cover the investment and economic fields every week, we know there’s still more that you might want to hear about. Ask us a question about investing, the markets or financial planning and one of Adviser Investments’ experts will answer it in a future edition of The Week in Review. CLICK HERE NOW TO POSE YOUR QUERY. About Adviser Investments Adviser is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process., institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index., socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868. For informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. All investments carry risk of loss and there is no guarantee that investment objectives will be achieved. Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. Always consult an investment professional before taking any action. Tags: alternative investmentsInvestingstocks