Once the domain of investment bankers, blank-check firms have become something even people who aren’t avid stock traders are talking about.
These days it seems everyone and their mother is investing in SPACs.
For Joe Kunkle, that’s literally the case.
Kunkle, of Philadelphia, runs a website for options traders. He’s used to spending his days talking about risky trades with people who see themselves as being on the vanguard of investing trends. So he was struck last month when he got a text about a special-purpose acquisition company — or SPAC — from his mother, who isn’t an avid trader.
She wanted in on shares of VG Acquisition Corp., a SPAC founded by billionaire Richard Branson that was merging with 23andMe, the DNA-testing firm. “She didn’t even ask what she should buy,” he said. “She just texted, ‘How do I buy this?’”
Branson and 23andMe Chief Executive Officer Anne Wojcicki each invested $25 million. Sandra Kunkle-Fischer, Joe’s mom, put in $200.
Kunkle-Fischer’s enthusiasm shows how SPACs have become attractive to even novice individual investors in recent times. But the trend is dismaying some financial planners who say they are too risky for people to gamble on.
Effectively corporate shells, SPACs take companies public through a back door. Instead of following the traditional IPO process — with its disclosure rules and regulatory requirements — these once-obscure financial vehicles raise money from investors first, then look for a private business to merge with later. Often, investors are betting on nothing more than the reputation of the person forming the SPAC.
In 2020, blank-check companies raised $83.3 billion from investors, according to data compiled by Bloomberg, up from
$13.6 billion in 2019. So far in 2021, they have raised more than $70 billion.
On Wednesday, the U.S. securities regulator said it’s “taking a hard look” at disclosures and other structural issues in the wake of a rapid increase in the number of SPACs.
Wall Street titans and billionaires such as Chamath Palihapitiya have been joined by rich celebrities participating in SPACs. Athletes Alex Rodriguez, Colin Kaepernick and Shaquille O’Neal have them. Ciara Wilson, best known for her 2004 album “Goodies,” sits on the board of one. Even Jay-Z has SPAC connections.
Individual investors have dived in, too, often attracted to SPACs because of their potential returns in a low-rate world. The hope is that the SPAC will find a company so attractive to merge with that its shares will rise in value. If the firm fails to find a good merger target, investors get back their money with interest.
But their track record is mixed: Over the past four years, 60% of SPACs that acquired businesses have lagged the S&P 500, according to Bain & Co.
Americans may know about SPACs, but they struggle to understand them. Only 27% of people who had heard of the vehicles said they understood how they work very well, the Harris Poll found. A full 43% said they understood SPACs “not too well” or “not well at all.”
Just as with Bitcoin, that disconnect hasn’t dented enthusiasm. Despite low levels of understanding, 75% of people who know about the vehicles still said they were at least somewhat interested in investing in them.
Kunkle-Fischer became intrigued in the VG Acquisition Corp. SPAC when she got an email in early February about the deal, announced on Feb. 4. She had received a 23andMe testing kit as a gift over the holiday season and likes the company.
“It just sounded good to me,” said Kunkle-Fischer, a 59-year-old clinical assistant at a high school who lives in Cape Coral, Florida. “I’m just that everyday normal person, hoping to win big.”
Kunkle said he warned his mother against buying what he viewed as an overheated stock.
“I want to retire early,” she said.
His response: “You’re not going to retire early buying stocks after they go up 30%.”
In the excitement, Kunkle-Fischer bought at $16 a share. VG Acquisition Corp. is now trading just south of $11.
The everyday interest in SPACs concerns George Gagliardi, a financial adviser at Coromandel Wealth Management in Lexington, Massachusetts.
“SPACs just scare me,” he said. “If a client came to me saying they wanted to get on a SPAC, I would play the Socratic approach. I’d ask them: ‘What do you know about them? What about earnings? They don’t have any? Oh, O.K. so you’re going to trust them to find the right company to invest in. Well, what’s the background of this guy running it?’”
Gagliardi says retail investors seeking some market buzz might be better served by buying something like stock in Apple Inc. “At least they have a track record,” he says.
The U.S. Securities and Exchange Commission is also cautioning investors against making investment decisions related to SPACs based solely on the celebrities that endorse them.
Buying SPACs at the individual-investor level resembles gambling, says Michelle Lowry, a professor of finance at Drexel University.
“We saw this during the internet bubble,” she said. “There were a record number of IPOs, huge first-day returns, and everybody’s talking about it. And if everybody’s talking about it in the conversation, you want to give it a shot.”
Lowry sees a progression in the investment world from simpler, easier-to-understand instruments like stocks into more complex vehicles like SPACs.
“It’s like the first time you do something, you try the more accessible option,” she said. “You try it again and you think, ‘Now that I’ve mastered the basics, I can try something a little bit more sophisticated.’”
That describes Owen Powell’s journey to SPACs. The 67-year-old from Philadelphia spent 37 years in the painting business. When work slowed down last year due to Covid, he was stuck at home. So he started trading equities on Robinhood.
Powell discovered SPACs when DraftKings Inc., the fantasy sports and betting operator, went public using a blank-check firm.
“It’s an opportunity to buy into some hedge fund run by a billionaire,” he said. “You have the opportunity to invest alongside them for around $10. It’s pretty much a no-brainer.”
Powell said he tends to avoid celebrity SPACs. But last month he did buy Slam Corp., the SPAC with Yankees star Rodriguez serving as chief executive, which filed with the U.S. Securities and Exchange Commission on Feb. 4.
“I don’t know anything about A-Rod,” Powell said, adding that he’d probably prefer Slam not have the baseball player involved, but felt the celebrity sparkle might boost the company’s price thanks to traders on Robinhood.
“You’re essentially joining forces with this guy,” Powell said. “You’re trusting him to do a good deal, and you’re becoming a very, very small part of his team.”