Last week the markets were up slightly, as unemployment claims slowly decline and talks of additional stimulus continue.
With all the recent frenzy in the markets, we’ve had several conversations about SPACs lately. Fortunately, that’s not a new disease. Unfortunately, it’s not necessarily a solid investment, either.
A SPAC is a Special Purpose Acquisition Company, sometimes referred to as a “blank-check company.” We talked recently about Initial Public Offerings, when a privately held company becomes a publicly-traded company. A SPAC accomplishes the same thing but from a different process.
A management group creates the SPAC, a publicly traded company from the start. As they sell shares and raise capital, the management team looks for privately held companies to purchase. Sometimes they are created with the express intent of buying one specific company. And sometimes it’s more open-ended, usually focusing on a particular industry. Shares are sold at $10 each, along with a warrant that gives investors the right to purchase more shares at a later date at a fixed price. The SPAC has two years to invest the money. If not, the fund is liquidated and proceeds are returned to the investors.
If you’re the manager of the SPAC, you’re doing pretty well. They are generally paid under a 20 and 2 plan. They receive a 20% equity stake in the company plus warrants to buy more shares, and an ongoing 2% fee on the assets of the SPAC, regardless of how much money the company makes or loses.
To put that in actual numbers, a SPAC that raised a billion dollars would generate $20 million in annual fees – plus they own 20% of the eventual company that’s acquired.
How has that worked out for the individual investor? From 2015 through October of 2020, there were 93 SPACs that ultimately purchased a company. Three were spectacular, earning 111% for their investors. Another 23 were profitable. The remaining 67 all lost money, the worst of which lost over 96%. On average, investors in SPACs lost just over 9%.
There are a lot of shiny objects in the securities industry. While it’s possible you’ll hit the jackpot, your odds are often about the same as hitting the jackpot in Vegas. When it’s your retirement savings, the hangover lasts much longer. I know it’s boring, it’s not sexy or exciting. I firmly believe you should build emergency savings, pay down debt, and invest for retirement in a well-diversified portfolio. If you want to take a small amount to gamble with, that’s fine – just know that it’s gambling, and not investing.
Your action to take this week is the follow-on to last week’s opening of a savings account or money market. This week, ask your employer to split your paycheck, with a small amount going to that savings account. At the low end, that may be $5 or $10. At the high end, maybe you’ll divert $100 a paycheck. It should be an amount you’re not really going to notice. If your employer won’t do a split deposit, see if you can set up an automatic payment with your bank to coincide with your paycheck being deposited.
Our signature event, Women, Wine & Wisdom, is discussing Investing 101 this month. You can register for that event, and find much more on our website at covingtonalsina.com, or visit our Facebook page to learn more.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. CovingtonAlsina and Great Valley Advisor Group are separate entities from LPL Financial.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, consult with your attorney, accountant, and financial advisor or tax advisor prior to investing.