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1 Big Risk of SPAC Investing

By Matthew Frankel, CFP® - Mar 9, 2021 at 6:16AM

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Before you buy a high-interest SPAC, here's one thing to keep in mind.

A big investor safety net when it comes to SPAC investing is that if the "blank check" company isn't able to find an acquisition target, investors get their money back. 

Well, sort of. Many SPACs trade at a big premium to the actual amount of money they have, and investors need to know and understand this risk factor. In this Fool Live video clip, recorded on March 1, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss what investors should know before paying a premium for shares of any SPAC. 

Matt Frankel: One big risk is that a lot of SPACs that don't have deals like IPOD [Social Capital Hedosophia Holdings IV (IPOD -0.20%)] and IPOF [Social Capital Hedosophia Holdings VI (IPOF 0.00%)] Chamath's two outstanding SPACs. They trade for big premiums to that. They're trading for, I think in the neighborhood of $14 to $15 a share and they don't have a target yet. If they can't find anything, investors will get $10 back, not the $14-$15 they're paying to buy the shares.

Jason Moser: Yeah. Yeah.

Frankel: Be wary when you're paying a premium for these things.

Moser: You would be paying that premium based on more than anything, probably just a track record, right? I mean, Chamath has a track record of some success here, and so people are probably thinking, "Hey, it's probably worth putting a little money down. I feel like I understand what he's trying to do, the types of company he wants to bring to the markets, I like his investing style." Whatever it may be. That track record allows you to make even more of a reasonably well-informed investment.

Frankel: Right. You really hit the nail on the head there. A pre-deal SPAC is a bet on management, period. There are about 300 SPACs at last count that are in the market waiting for companies to acquire right now. You know, 250 or so of them, should be ignored. You want to find the managers, not only did they have a good track record, but whose interests really align with yours. Which one of the two we're about to talk about in a minute fits in that category. But in Payoneer's case, this SPAC run by Betsy Cohen, who has a phenomenal track record in the banking space. She founded her own bank that's very successful, a banking heavyweight. You're betting on management, plain and simple. That's why people are willing to pay a premium for some of these even before they have a deal. One that I own is called VG Acquisition (VGAC), which is Virgin Group's SPAC. They recently announced they're taking 23andMe public.

Moser: Oh, no kidding.

Frankel: Even before they announced that, the SPAC was trading at a pretty decent premium to the $10 a share that people put into it in the first place. The reason is because Richard Branson is a guy you want to bet on.

Moser: Yeah, he's got a little bit of a track record there.

Frankel: Historically it's been a mistake to bet against Richard Branson. People were betting that he would find a company to acquire that would deliver long-term shareholder value and he did. Well, so far we all know that it's not completed yet. But they've announced the merger agreement. It's still trading as V-G-A-C, which is VG Acquisition Corp. It's a bet on management to find a great deal, and people who have bet on management and who were right, can be really handsomely rewarded. I mentioned DraftKings (DKNG -0.85%) already. Look at the stocks of Virgin Galactic (SPCE -0.46%) is another one that went public by SPAC. Opendoor (OPEN -0.72%) is one that went public by SPAC. Penn National Gaming (NASDAQ: PENN) I think is one if I'm not mistaken [NOTE: Penn National Gaming was not a SPAC IPO]. Maybe I'm misspeaking on that one, but there've been a bit a bunch of really successful SPAC IPOs is the point. Led by managers with great track records who did it again. That's what you're trying to find. That's why Chamath is on his fifth and sixth SPAC on the public markets, and people are willing to bet that he's going to keep the streak alive and find something good to acquire.

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Stocks Mentioned

Social Capital Hedosophia Holdings Corp. IV Stock Quote
Social Capital Hedosophia Holdings Corp. IV
IPOD
$9.93 (-0.20%) $0.02
Virgin Galactic Holdings, Inc. Stock Quote
Virgin Galactic Holdings, Inc.
SPCE
$6.55 (-0.46%) $0.03
DraftKings Inc. Stock Quote
DraftKings Inc.
DKNG
$14.03 (-0.85%) $0.12
Opendoor Technologies Inc. Stock Quote
Opendoor Technologies Inc.
OPEN
$6.85 (-0.72%) $0.05
Social Capital Hedosophia Holdings Corp. VI Stock Quote
Social Capital Hedosophia Holdings Corp. VI
IPOF
$10.01 (0.00%) $0.00
VG Acquisition Corp. Stock Quote
VG Acquisition Corp.
VGAC

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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