Remember when SPACs were a thing? What were they, and why did they go away?

There are several avenues that a private company can take to go public, with the common goal of raising capital:

• IPO (Initial Public Offering) is the most popular way to go public. A private company enlists underwriters to solicit investment for the public endeavor. 

• A direct listing sidesteps the need for underwriters and simply lists itself as publicly available to trade on the open market. One big caveat to this approach is the insiders of the direct listing can sell their shares immediately. IPO insiders are typically bound by a lockup period. 

• Finally, SPACs (Special Purpose Acquisition Vehicles) offer another option for private companies to go public. It is essentially a shell company raising public funds to buy private companies. 

A recent wave of SPAC transactions has caught the attention of investors in the past two years. High-profile private companies like Lucid and Sofi were suddenly available to the investing public through SPAC vehicles. Previously, IPOs were only available to investment bankers and their close friends. The general public could not invest in the IPO until it was made available to trade after the inside group had their opportunities to invest. A few recent traditional IPOs were DoorDash, Uber, Snowflake, and Rivian. All of these companies debuted much higher than their stated IPO price. Many investors felt they got secondhand scraps (and that’s because they did). We don’t know exactly why so many investors were attracted to SPACs but the fear of missing out (FOMO) can be an important factor. 

SPACs have opened the opportunity to buy a company before it is made public, but with this opportunity comes outsized risks. The allure of big gains attracts lots of attention, but not a lot of thoughtful research. We charted returns of the S&P500 against two ETFs that track IPOs (Ticker: IPO) and SPACs (Ticker: SPAK). Investors are currently not rewarded for the amount of risk they are bringing into their portfolios.

SPACs and IPOs probably have a place in speculative portfolios but understanding a proper strategy may help balance out absolute losses. In a baseball lineup, there’s typically a homerun hitter who is surrounded by on-base or singles hitters. These “safer” lineup players aren’t completely foolproof, but they allow the homerun hitter to sometimes strike out and still potentially win games. 

Think of your portfolio as a lineup of diversified skillsets to execute on specific jobs. Some players play good defense and are there to prevent blowouts. Some players are there for consistency at the plate. Now imagine your portfolio with nothing but homerun hitters. You’ll do extremely well when these players are all hitting home runs, but their tendency to strike out a lot means you’ll do extremely poorly in cold periods. Think of a portfolio of disruptive tech companies and SPACs that did extremely well in 2020 but came under pressure in 2021. Being able to withstand these down periods is difficult because your portfolio will lag significantly, like your lineup of home run hitters, will lose a lot of games.  

There are still ways to find homerun hitters in already established companies. It doesn’t have to be SPACs, IPOs, or Direct Listings that can help you hit home runs. Imagine buying a boring company like Pepsi in the 1970s. It was trading at $1 per share. If you just bought one share, you would be sitting on $24,567 today. If you think of Pepsi as a singles hitter, you’d be right. Granted, I’m cherry-picking but this example shows compounding over time is more of a miracle than hitting that homerun. 

If Pepsi were a baseball player, it wouldn’t be everyone’s favorite player. You can bet when Pepsi is done playing baseball, it will be in the hall of fame. Compounding growth is the unappreciated force in investing. Albert Einstein called it “man’s greatest invention”.

It is likely that SPACs have fizzled and playing down in the minor leagues. There’ll be another shiny investment vehicle that will come and go. We believe investors will be happier in the long run watching their single hitters get on base consistently.

Disclosures: 

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

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Consilio Wealth Advisors, LLC (“CWA”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where CWA and its representatives are properly licensed or exempt from licensure.