SPAC deals are an interesting method of investing that can be profitable. If you don’t know what they are, we’ll quickly cover some of the basics and tell you why this might be a good investment opportunity for you.
In the 1990s, public pension funds across America were saddled with an aged portfolio that was ill-equipped to keep pace with current market trends and generate adequate returns. The solution: Special Purpose Acquisition Company (SPAC) deals and SPACs for short. In essence, a SPAC is simply a private equity fund that raises capital through an offering on the public markets at a discounted rate and then invests in large mergers or acquisitions thereafter. It may seem counterintuitive but when handled properly, it can be a great way to make substantial returns.
What is SPAC and What are the Best SPACs?
SPACs are Special Purpose Acquisition Company. These companies were created to provide capital to buy out companies that have been undervalued by their market capitalization, but still profitable. In 2008, the name of this kind of company changed a little bit, instead of being called Special Purpose Acquisition Company, they are now named “Special Purpose Acquisition Companies (SPACs).” The idea was to discuss these deals as simply “an SPAC.
What SPACs are good for:
They are a great way for investors with well-diversified portfolios to generate significant returns in a relatively short period of time. SPACs can be used to acquire large companies at discounts and either take them public, restructure them, or sell them outright. The annualized return rate of SPACs is around 37%.
What SPACs are not so good for:
They may be exciting, but they are certainly risky. Though the returns can be phenomenal they can also be penalizing in the event of an acquisition that fails to pay off. The opening of a business sector or industry or a company can also have a negative effect on stock prices as well as a premium paid at the time of purchase.
Investors should also remember that as with many other types of investments, the larger the company the greater your chances of success. Also, SPACs can be quite risky financially; so investors need to consider their rewards versus risk before jumping in. Because it’s not always easy to properly identify undervalued companies, this is where a good analyst comes in handy. He or she can help you determine the size, growth potential and profitability of a target company.
If you’re interested in taking advantage of these types of opportunities, we suggest doing your homework. You’ll have to look at the financial statements as well as assess similar sectors in order to make an educated decision. This is where your research skills will come in handy.
Are SPACs right for you?
If you are an investor with very little capital to invest, this may not be a good option for you. But if you have a diverse portfolio or even significant holdings, it could be a great opportunity for you to enhance the returns of your portfolio. It’s really up to you to make that decision. Once you do decide, it’s important that your research is informed and your decision is well-thought-out.
Need advice? Chardan may be able to help!