“The level of confidence is through the roof”

Wall Street has a dear new investment. And while financiers need to make big profits, there are reasons for mom and pop investors to step on it easily.

Investments – SPACs or special purpose procurement companies – are like quasi-IPOs:

A publicly traded company uses investors’ money to buy or merge with a private company, usually within two years. In this way, the private company becomes publicly traded. If there is no transaction within the specified period, investors recover their money.

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SPAC supporters see them as a form of venture capital that could allow investors to get a share of high-growth businesses at an early stage. There is also some protection against losses, depending on when investors buy.

But SPACs are also known as “blank check” funds – because investors give money to a manager without knowing which company they might eventually buy. Managers can identify certain industrial or business objectives in the initial filings, but are not required to pursue them, essentially giving them a white paper.

In some cases, investors can buy the star power of a manager.

The list of SPAC sponsors includes, for example: Bill Ackman, the renowned hedge fund manager; former House Speaker Paul Ryan; former Trump economic adviser Gary Cohn; and sports icons such as Shaquille O’Neal, Alex Rodriguez and Colin Kaepernick.

“Invest in people,” said Michael McClary, chief investment officer at ValMark Financial Group. “The level of confidence is through the roof.

“It simply came to our notice then [SPACs] in a bucket of gold and bitcoin, “he added.” It is extremely speculative. And there is no financial analysis that you can really do. “

Investment groups are not new. But they have grown in popularity.

SPAC’s initial offerings quadrupled last year to 248, according to Jay Ritter, a professor of finance at the University of Florida. IPOs are set to quadruple again in 2021, he said.

They raised nearly $ 26 billion last month, a record.

“The market is exploding,” Ritter said.

Retail investors seem to be driving much of the frenzy – as they have done with other recent rages, such as GameStop stocks.

But the video game retailer offers a warning story for investors trying to capitalize on a hot ticket item: the stock has risen 1,700% in less than a month; it promptly lost most (85%) of its value in the next two weeks.

In the case of SPACs, retail investors seem to be chasing past returns, according to Ritter.

SPACs listed this year had an average first-day yield of 6.1% – about six times higher than in 2003-20, Ritter said.

“If things hadn’t gone so well in the last six months, I don’t think we would have seen this boom, “he said.

There are reasons for caution, according to financial experts.

More and more mom and pop investors are not buying shares at the initial listing price of SPACs, Ritter said. (Typically, these are listed at $ 10 per share.) Retail investors who do not enter early will not participate as much – or not at all – in that initial share price value.

A key selling point of SPACs was the money back guarantee, which limits the risk of disadvantage. Investors may choose to repurchase their shares when a merger or acquisition is announced, rather than becoming a shareholder in the combined entity.

However, investors will not necessarily recover everything. They are entitled to $ 10 per share, plus some interest. If they bought shares at higher prices on the open market – say, with 12 USD – they would lose (about 2 USD per share, in this example). Shares in the combined entity may also fall below $ 10 when trading begins.

“As in any case, there may be some risks,” said Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland. “They are not suitable for everyone in any situation.”

Returns were also not stellar when measured against standard standards, according to experts.

The typical SPAC buy-and-hold investor earned a 45% gross profit between January 2019 and 2021, Michael Cembalest wrote in a recent note from JPMorgan analyst. (The analysis measures the profitability of the average investor.)

However, investors would have gained a higher return on the S&P 500 stock index, which gained 52% over the same period.

“Absolutely good returns so far, but in the capital bull markets, rising tides are raising all the boats,” said Cembalest, chairman of market and investment strategy for JP Morgan Asset Management, suggesting that SPACs are moving into a stock market. strong.

The typical SPAC fund manager also earned much more money than investors – a return of 682% over the two-year time horizon, according to Cembalest.

This is partly due to the structure of the funds: managers usually get a 20% stake in the acquired company for a low initial cost. However, I don’t get anything if a business doesn’t materialize.

Therefore, they have an incentive to make transactions. The good ones may be harder to find in a flooded capital market for investors.

“The SPAC boom could end up bringing many more risky companies to market,” according to Cembalest.