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Here's the Biggest Predictor of a SPAC's Success

By Matthew Frankel, CFP® – Updated Jul 22, 2021 at 10:34AM

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There is one factor that is closely correlated with the returns a SPAC produces for investors.

When it comes to investing in special purpose acquisition companies, or SPACs, there is no shortage of choices. So, how do you separate the long-term winners from the rest of the pack? In this Fool Live video clip, recorded on July 12, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser talk about the one factor that is turning out to be the best predictor of long-term SPAC returns. 

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Jason Moser: Matt, we talk a decent bit about SPACs on this show, we even ran a four-part series on SPACs earlier this year. I had a lot of fun putting those shows together. You and I were talking about an article we just read here on CNBC in regard to SPACs. There were some interesting data from Wolfe Research in this article, it was talking about the performance of SPACs. I think it's basically about one year in here. But this data from Wolfe Research says that on average, SPACs with experienced sponsors record greater returns since by sponsors, that's the blank check company that's bringing the actual business into its universe, to bring it public. We want to talk about this for a minute, just from the bigger-picture perspective of SPACs and what do you think about this data, what do you think it says? Then also talk a little bit more. There's a specific SPAC out there that's been in the news here over the past couple of days, Virgin Galactic (SPCE -1.15%), for obvious reasons, a successful flight there into space. But let's go ahead and start with just the bigger-picture implications here. Because, it doesn't sound all that surprising, but by the same token, it does feel like this is still a very short timeline on which to be judged.

Matt Frankel: It is and I think the point that they are trying to make is that the market was flooded with SPACs. I have some stats right here. In 2018, there were 46 SPACs that went public, in 2019 there were 59, in 2020 there were 248.

Moser: Holy cow.

Frankel: In 2021 already, there were 367.

Moser: Wow.

Frankel: The market was flooded with these. It used to be that when you were a SPAC sponsor, it's because you knew something about the business or the industry you were trying to go after. Now it's like everybody with any credibility was starting a SPAC, Shaquille O'Neal had his own SPAC.

Moser: I was going to say it doesn't even feel like you really need that credibility. You just have to have some name.

Frankel: Unless he was trying to take the Los Angeles Lakers public. I really don't know how his experience would come into play.

Moser: Or Papa John's (PZZA -0.01%) maybe I could see at least some pizza place because he sits on the board of Papa John's I think still-

Frankel: He owns a lot of Five Guys.

Moser: That's pretty good.

Frankel: But I love Shaq, so nothing against Shaq.

Moser: Yeah. Me too.

Frankel: But the point being, and that's really one of the things I look for, everyone always says, how do you pick out all of these SPACs? There's 400 of them -- how do you decide the three to put in your portfolio? That's one of the things I look at it. Remember Latch (LTCH 0.29%) we had on the show, they will take it public by a TSI Innovation Acquisition sponsored by Tishman Speyer, one of the biggest commercial real estate firms in the country. That's clearly a sponsor that knows a lot about that industry, that's a good partner. SPACs, the partnership aspect is really undervalued. The celebrity aspect of it is getting way too much attention and the partnership aspect is getting too little. Think of The Motley Fool's investing strategy, how we want businesses that are partners. We want businesses where the CEO is a partner to their shareholders. When I got hired here, they told me that we would rather have a great partner than a great writer. It's such a valuable part of business in general, and it's become undervalued in the whole SPAC craze just because of all the big-name people throwing their names and not even like the sharks like the Bill Ackman and Chamath [Palihapitiya].

Moser: Yeah.

Frankel: Chamath worked at Facebook (META 2.53%), did he ever start a space travel company? No -- that one's done well. But that's the exception, not the rule according to this research.

Moser: Yeah.

Frankel: There are a lot of successful SPACs that were partnered with people who knew that industry really well. I mentioned Latch as a great example, 23andMe (ME 7.10%) you can argue that Richard Branson has a lot of experience with consumer branding and things like that. I don't think he's done any genetics research himself, but that's not really the point, it's a consumer products company at this point.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Matthew Frankel, CFP owns shares of 23andMe Holding Co. and Latch, Inc. The Motley Fool owns shares of and recommends Facebook. The Motley Fool recommends Latch, Inc. The Motley Fool has a disclosure policy.

Stocks Mentioned

Latch Stock Quote
Latch
LTCH
$0.91 (0.29%) $0.00
Meta Platforms Stock Quote
Meta Platforms
META
$123.49 (2.53%) $3.05
Papa Johns International Stock Quote
Papa Johns International
PZZA
$83.12 (-0.01%) $0.01
Virgin Galactic Stock Quote
Virgin Galactic
SPCE
$5.14 (-1.15%) $0.06
23andMe Holding Co. Stock Quote
23andMe Holding Co.
ME
$3.47 (7.10%) $0.23

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

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