A Kellogg professor offers his perspective on why these investment vehicles can be losing propositions for many casual investors
Special purpose acquisition companies (SPACs)—which are listed investment vehicles for taking private companies public via mergers, as an alternative to traditional IPOs—have exploded in volume and popularity over the past two years. In 2020, 248 SPACs were listed on public exchanges for an average listing size of $336 million and a total amount of capital raised of $83 billion. In contrast, in 2021, 613 SPACs were listed at an average listing value of $265 million and gross proceeds of $162 billion. Currently, there are 575 listed SPACs that are actively looking for target companies with which to merge and, in 2021, 312 mergers were announced and 199 mergers were completed at a gross value of more than $450 billion.
All this activity is attracting investor attention, but too many of them fail to understand that SPACs are very complicated investment vehicles that mostly benefit everyone involved in the merger deal—except retail investors, themselves. Therefore, it is imperative that investors understand the finances behind SPACs before investing in them.
[This article has been republished, with permission, from Kellogg Insight, the faculty research & ideas magazine of Kellogg School of Management at Northwestern University]