Given that it's 2021 and hundreds of special-purpose acquisition companies (SPACs) have gone public already this year, it shouldn't be a big surprise that Warren Buffett was asked what he thinks of the SPAC boom at Berkshire Hathaway's (BRK.A 0.41%) (BRK.B 0.11%) annual meeting. In this Fool Live video clip, recorded on May 3, Fool.com contributor Matt Frankel, CFP, and Industry Focus: Financials host Jason Moser discuss what Buffett had to say, and what investors need to know.
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Matt Frankel: So, Buffett first started talking about SPACs when asked about how they affect Berkshire's ability to find acquisitions. He said that's killing their ability to find deals.
Jason Moser: Yeah.
Frankel: There are 400 SPACs in the market, all looking for targets. They all have a ton of cash. Things are getting expensive. He's pretty much saying the SPACs are overpaying for businesses. He's saying it won't go on forever. That's where the money is now. That's what people are interested in now. To be fair, take that with a grain of salt. People have been upset with Buffett's lack of ability to find deals for five years now. This has been going on for way before the SPAC boom. But the cash forward is just building up, and I think the whole elephant-gun quote was before anyone knew what a SPAC was. With that in mind, but his point is the SPACs pretty much have to deploy their capital within two years, which is true. That's usually the rule. He said if you put a gun to my head and tell me I have to buy a business in two years, I'd buy one. I wouldn't necessarily get the best deal, but I promise you, I would take that money and buy a business with it. Munger, being Munger, said it's not just stupid, it's shameful talking about the SPAC boom. But Buffett was a little bit more thought out about it.
Moser: I feel like we went over a month's worth of shows talking about SPACs, and the merits, then the challenges and whatnot. I feel like there are probably going to be more losers in this space than winners. But there are going to be some important companies that come from this movement. I think they're going to be some important companies that have come public via SPAC, and we won't be sorry that they were able to come public. You just have to be very discerning, it feels like, with this space.
Frankel: Yeah, that was essentially the whole underlying theme of the shows we did. Everyone knows that I'm a SPAC investor. It's one area that I clearly disagree with Buffett and Munger on. I think that out of the 400, there are probably 10 you should pay attention to.
Frankel: But there are going to be some great companies that go public. I mentioned 23andMe as one that I'm particularly a big fan of as a company that's going public via SPAC. I think Opendoor (OPEN 3.10%), which went public through SPAC last year. I think it's a big one that has a ton of market potential. There have been some great companies that are going public through SPACs.
Moser: I'd put AppHarvest (APPH) up there, personally. AppHarvest controlled environment agriculture came public via SPAC. I think that's another one that to me, we talk about where we feel the world is headed, I feel like that's solving a big problem, and I feel like that is a direction that the world needs to be headed. Whether AppHarvest goes public this year, or five years from now, maybe that doesn't necessarily make a difference, but maybe it does. The SPAC gives them the opportunity to get public, and have those benefits, that capital access, that they might not have otherwise. Maybe they are a little bit earlier to the game, but I feel there are some companies out there that are important, and it's just giving them a little bit of an earlier start.
Frankel: Yeah. Think of it like the SPAC class of 2020 and 2021.
Frankel: Like any class, you've got your top 10% that are going to go on to Ivy League schools or whatever. With SPACs, stay away from the bottom of the class.
Moser: Well, I think you just came up with an idea there. I feel like we need to build out an Ivy League class of SPAC recommendations. Maybe that's how we piggyback off a series of shows that we did earlier in the year on SPACs. The Ivy League SPAC portfolio.
Frankel: I like it. The Ivy League basket.