2020 was the year of the SPAC, or special purpose acquisition company. During the year, 248 of these so-called "blank check" companies went public, raising a total of $83 billion. This is more than in the previous 10 years combined.
To be clear, I don't think buying just any SPAC is a good investment, and the SPAC boom has been a little overdone. Many of the 248 SPACs that went public last year likely won't find acquisition targets. But there are some that looked so attractive to me that I decided to add them to my portfolio. Here's why I'm so excited to see what these SPACs can do with their capital.
My two SPAC investment principles
Before we get into the specific SPACs I bought, there are two principles I use when looking at SPACs to invest in. Together, they eliminate more than 95% of pre-deal SPACs from my watch list.
First, investing in a SPAC before it identifies an acquisition target is a bet on a management team. Period. That's what you're investing in. I'll only invest in SPACs whose managers have an excellent track record of not only making successful investments, but also of avoiding outsized risks.
Second, a SPAC must align with my own investment style. I have absolutely no desire to chase the next electric vehicle stock, for example, so I avoid any SPAC that has an interest in this field. I'm a value investor at heart, and I don't like to swing for the fences. If you consider some of the recent companies taken public via SPAC IPO, you'll probably understand why this eliminates most of them.
3 SPACs I bought recently
With those two rules in mind, here are three SPACs that I've added to my portfolio over the last month or so:
- Pershing Square Tontine Holdings (NYSE:PSTH): The largest SPAC in history, Pershing Square Tontine Holdings completed its IPO in July 2020, raising $4 billion. The company was formed to buy a "mature unicorn," of which there is a limited supply. An acquisition could take a while. Fortunately, the company has about 18 more months to find a target, and the SPAC's leader, Bill Ackman, has a strong track record of making savvy investments.
- Starboard Value Acquisition Corp. (NASDAQ:SVAC): The Starboard Value Fund, led by Jeffrey Smith, is arguably the most successful activist investor of all time, with 84% of its activist campaigns ending profitably. Starboard recently decided to bring its value-seeking methods to the SPAC world by raising $360 million in an IPO of Starboard Value Acquisition Company. The company is looking to acquire a company in one of several sectors. Given the company's value-investing mindset, Starboard will likely target an under-the-radar company where its managers can add significant value to the business.
- Yellowstone Acquisition Corp. (NASDAQ:YSAC.U): The smallest of the three SPACs on this list, Yellowstone Acquisition was formed from a subsidiary of Boston Omaha Corporation (NASDAQ:BOMN). It raised about $136 million in its November IPO. Boston Omaha is often compared to an early stage Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) due to its value-conscious approach to investing and its conglomerate-like approach to acquiring businesses. Yellowstone plans to pursue an acquisition target in the "homebuilding, manufacturing serving the homebuilding market, financial services and commercial real estate industries," all of which are areas where I believe there are substantial overlooked growth opportunities.
It's also worth noting that I own shares of Chamath Palihapitiya's SPACs in my portfolio as well. These are Social Capital Hedosophia IV (NYSE:IPOD), Social Capital Hedosophia V (NYSE:IPOE), and Social Capital Hedosophia VI (NYSE:IPOF). I'm very optimistic about all three. However, they aren't recent purchases of mine.
A pre-deal SPAC is a speculative investment, but with some protection
As a final thought, it's important to mention that buying a SPAC that has not yet identified an acquisition target is a highly speculative investment. There's certainly some level of protection in the sense that if the company fails to find a target in a certain amount of time (usually two years), investors get their money back.
However, the risk is what could happen when the SPAC does find a company to take public. Given the recent success of SPAC IPOs such as DraftKings (NASDAQ:DKNG), Opendoor (NASDAQ:OPEN), and others, it's easy to forget that IPOs can decline after going public. There's no guarantee that the SPAC's target will be a company you want to own. For this reason, I've opened small positions in the three SPACs discussed here (less than 1% of my total portfolio). Other SPAC investors would be wise to exercise caution as well.