Financial advisers are steering clients away from SPACs

Man in suit holding up hand in s stop gesture

Special purpose acquisition companies are leveraging celebrity endorsements to drive investor demand, while financial advisers struggle to protect clients from risk.

In the latest example of baffling investor euphoria, recently obscure special purpose acquisition companies have become so popular that most financial advisers refuse to go near them.

“You’re putting money into a shell company and you don’t even know what it will be investing in,” said Laura Mattia, senior adviser at Atlas Fiduciary Financial.

“We tell our clients that SPACs are a gamble, not based on a company with a solid business model that has proven to provide goods and services people want and therefore are expected to earn future profits,” she added. “This cannot be called an investment. When the bubble bursts, it is the individual investor that will lose.”

The bubble Mattia refers to is being tracked by SPACInsider, which counts 276 of these so-called blank check companies going public since the start of the year, which compares to 248 for all of last year, and 59 in 2019.

In 2010, there were just seven public stock offerings of these odd asset-less companies that are sold based on the promise that the managers, who typically take a 20% stake right off the bat, will discover a worthy private company to acquire.

“It’s a just a company with a bunch of money and you’re betting they’re going to find a deal,” said Leon LaBrecque, chief growth officer at Sequoia Financial Group.

LaBrecque said he has participated in the SPAC market, but that he is not investing in them on behalf of his clients and doesn’t even talk to clients about them, unless the clients bring up the topic.

“I do have some clients asking about them, but we don’t recommend them unless clients ask about them,” he added.

LaBrecque describes SPACs as “weird hybrid between initial public offerings, private equity and hedge funds.

“The space is getting crowded, so do your homework,” he said.

Special purpose acquisition companies are similar to private equity investing and certain hedge fund strategies in that investors hand over money expecting the fund managers to invest in multiple businesses for a profit. PE and hedge fund investing is also restricted to wealthy individuals and institutions.

With SPACs, the blank-check company sells shares through the public equity markets to anyone with a brokerage account with the intention of buying a single private company at some point within two years after the IPO.

For an example of the frenzy surrounding the space, consider Pershing Square Tontine Holdings (PSTH), which went public in October at $20 per share and is currently trading at almost $26, despite being a company made up of just cash.

The appeal, and the bet investors are making when it comes to Pershing Square Tontine, all boils down the belief that billionaire investor Bill Ackman will deliver something big as chairman and chief executive of the blank check company.

“I learned about SPACs in the ’90s, after they were first created by an investment banker, as hot new investments and then again in the 2000s until market crashes dampened speculation and the appetite for SPACs,” said Mattia. “Coincidentally, this current new interest in SPACs corresponds with the boom in technology stocks, Bitcoin and the exuberance in the stock market that give responsible investors pause. Sure enough, many of the current SPACs are looking for deals in technology, healthcare and energy transition with promising futures that have yet to materialize.”

Paul Schatz, president of Heritage Capital, also worries about the sudden bubble-like appeal, which includes celebrities from well outside the financial services community lending their names to SPACs to help boost demand.

“In normal times, SPACs are very valuable and good tools for a sponsor to affect an outcome,” he said. “However, like everything else when too much of a good thing happens you get historic greed and euphoria. Today this sector is over-the-top greedy and euphoric. All the good and smart sponsors brought their products out months and months and months ago. Today the SPAC sector is very, very high profile with lots of individual investors looking at it.”