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What is a SPAC?

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The high levels of volatility in the markets over the past fourteen months have led to some strange occurrences. During the swift and vicious declines of March 2020, those eager to avoid further losses led to an indiscriminate tossing out of babies with the bathwater.

Now, there are signs of the opposite in a few corners of the markets.  For example, if you missed my recent video that covered the short squeeze phenomenon, you can check it out here.  Another example is the recent collapse of a large hedge fund-like vehicle. That collapse, apparently which involved derivatives like total return swaps and massive leverage, saddled lenders with significant losses.

Yet another sign of heightened risk-taking is a type of security that was relatively obscure until recently. That is the Special Purpose Acquisition Company, widely known as a SPAC. Here is how it works. A promoter of the SPAC issues shares to the public raising money to buy a private company. The company isn’t yet identified when the SPAC is funded. I’ll say that again. The company isn’t yet identified when the SPAC is funded.

Appropriately, this is known as a blank check company or a blind pool. Recently, these SPACs have been associated with celebrities and sports figures, which has given them that much more attention.

While risky and far from transparent, these investments have proven very popular with some investors. According to SPAC Research and CNBC, there were 292 SPAC offerings in the first quarter of 2021, shattering the 2020 record in just three months.

This issuance also caught the eye of the Securities and Exchange Commission (SEC). The SEC gave proposed accounting guidance altering the way SPACs would be allowed to account for equity. Given the glut of offerings and the SEC interest, the CNBC SPAC Post Deal Index gave up gains for 2021 and has fallen 20% year-to-date as of last week. This is in comparison to the less exotic S&P 500 being up approximately 10% year-to-date.

What does it all mean?

In the wake of these odd market occurrences, we are often asked if they have implications for the broader market. So far, each of these have been contained with little spreading to other areas of the markets. While the names and the securities change, this type of thing has occurred countless times over the years.

Fear and greed are strong emotions and powerful market forces. They can create gains and crushing losses. We believe the key is a careful calculation of risk. The investment world often defines risk with odd names like beta and standard deviation. We believe that the greatest risks come from not having enough information to calculate risk. In that case, one might pass on an opportunity no matter how good it sounds. Investing and often speculating outside of a model based on knowledge of one’s goals is not a sound financial plan.

The series of strange events that occur as the cycle shifts from fear to greed and back again will likely continue as they always have. It is our work as investors to navigate them. As the old saying goes, “the dogs bark but the caravan moves on.”

 


Sources: FactSet, Bloomberg, S&P Global, CNBC, Wall Street Journal.

Adam Weingartner is a registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Bluestone Wealth Partners is not an affiliate of Lincoln Financial Advisors Corp.  Lincoln Financial Advisors does not provide legal or tax advice.  CRN-3570135-042821