The investment returns for most SPACs are not as good as those for traditional IPOs.
A SPAC, also known as blank-check company, is a stock created by sponsors that raises money in an initial public offering with no underlying business. Investors entrust their money to one of these sponsors, instead of to an operating company.
Typically, the SPAC must use its cash within two years to buy a private company (in a de-SPAC transaction), or refund the money to investors. Generally, investors don’t know what the acquisition target will be until the announcement.
New but not necessarily improved
Investors always intend to make money. Unfortunately, the track record for profitability among SPACs is not stellar. Most of the larger SPACs formed since 2020 that were still trading as of April 30, 2021, have declined in value. Nearly 200 of these stocks dropped between 0% and 2% compared to their IPO prices; over half of those did worse. Overall, the mean return of SPACs since 2015 was -9.6%; the median return was -29.1%. Only 31.1% had positive returns. Traditional IPOs had returns of 47% over the same period.
Riding the roller coaster
Investors may be fooled by short-term performance of SPACs. In the first phase of their life cycle, post-IPO, i.e., the initiation of the SPAC, SPACs somewhat underperformed the S&P SmallCap 600 Index. However, on announcement of a target for acquisition, the stocks temporarily soar, and some of the stocks continue to do well for a little while.
But only 30 days later, most are back to underperforming the S&P SmallCap 600. After the de-SPAC deal is completed, the stocks tend to decline, and investment returns get worse over time after the merger deal, with mean down 17.6% and median down 28.8% a year later.
Down when the market is up
The CNBC SPAC 50 Index, which tracks the 50 largest U.S.-based pre-merger blank-check deals by market cap, has slumped nearly 4% year to date, erasing all 2021 gains, at a time when the Nasdaq has gained 6%. The CNBC SPAC Post Deal Index, which includes the largest SPACs that have come to market and have announced a target, is down about 15% year to date.
Tech SPACs that have closed a deal have underperformed. Financial firms and industrials have done better. Automotive companies have done particularly well, though that is possibly due to speculative investment in driverless or “green” technology.
Conclusion:
SPACs may seem to be a good alternative to traditional IPOs for small-time retail investors, because of the relatively low cost to own shares. However, over the last 18 months, the average investment returns for SPACs have been far inferior to those for traditional IPOs.