There has been a surge in popularity in special purpose acquisition companies (SPAC) recently. The idea of these so-called "blank check" companies isn't exactly new, but more SPACs went public and more funds were raised by these companies in 2020 than in the previous 10 years combined.
At first, SPAC investing might seem like a highly speculative type of investment. You're essentially buying a stock without knowing anything about the business you'll ultimately be buying, and there's a chance that no business combination will even take place at all. What's more, many of the types of businesses being taken public by SPACs, such as electric vehicle manufacturers and legalized gambling plays, are certainly speculative in nature.
Buffett loves putting his faith in good management
Berkshire Hathaway owns more than 60 subsidiary businesses, but Buffett and the rest of Berkshire's team have very little involvement with the day-to-day operations of any of them. This is because Buffett will not acquire a business that doesn't have a top-notch management team already in place.
It's difficult to overstate the value Buffett places on good management as part of his investment strategy. Buffett once said, "And so the important thing we do with managers, generally, is to find the .400 hitters and then not tell them how to swing." In other words, find the best managers in their respective businesses and let them do their thing.
Why this matters for SPAC investing
When you're investing in a SPAC that hasn't yet identified an acquisition target, you're essentially making a bet on that SPAC's management. For example, Chamath Palihapitiya's two remaining pre-deal SPACs, Social Capital Hedosophia Holdings IV (NYSE:IPOD) and Social Capital Hedosophia Holdings VI (NYSE:IPOF) trade at huge premiums because investors have enormous faith that he'll be able to replicate the success of his previous SPACs. When it comes to the world of "blank check" companies, calling Palihapitiya a .400 hitter simply doesn't do him justice.
The point is that with literally hundreds of SPACs in the market, and more going public each week, investors like Buffett (and you and I) can pick those whose managers have excellent track records and align with their interests.
Given Buffett's style, Bill Ackman's SPAC, Pershing Square Tontine Holdings (NYSE:PSTH) is one that immediately comes to mind. Not only is much of Ackman's investing style modeled after Buffett (Forbes magazine once actually called Ackman "Baby Buffett" in a 2015 cover story), but as the largest SPAC in history, it could actually prove to be a needle-moving possibility for Berkshire. https://www.businessinsider.com/forbes-think-bill-ackman-is-the-next-buffett-2015-5
Another reason Buffett might like the SPAC model
It's also worth mentioning that investing in a pre-deal SPAC offers a margin of safety, which is another concept Buffett loves to incorporate into investments. If you aren't familiar, Buffett explains this concept as such:
"On the margin of safety, which means, don't try and drive a 9,800-pound truck over a bridge that says it's, you know, capacity: 10,000 pounds. But go down the road a little bit and find one that says, capacity: 15,000 pounds."
With SPACs, the margin of safety is twofold. If the SPAC's management announces an acquisition that shareholders don't like, they can vote against the business combination. And if the SPAC cannot find an acquisition target in the predetermined amount of time (typically two years), investors get their money back with interest.
Would Buffett actually invest in a SPAC?
To be clear, I'm not saying that Warren Buffett or any of Berkshire's stock-pickers are actually going to invest in a SPAC. And although there are hundreds of SPACs in the market, many are too small to be needle-movers for Berkshire. However, as we've seen here, SPAC investing has more in-line with Buffett's investment style than you might think.