Ever since the market has kept running bullish (since March of 2020), many companies have filed for IPOs too, with some of our favorite companies like DoorDash and Airbnb entering the New York Stock Exchange and the Nasdaq. However, another method of going public (known as SPACs) has also become increasingly popular. A SPAC, or special-purpose acquisition company, is a blank-check company with the purpose of raising capital to merge with a private business. The only asset these companies contain is the capital raised as they have no service or product to provide. These are often created by institutional investors, especially private equity firms who bring experience that leads to people buying the SPAC. This plays an important role because retail investors, most of the time, don’t know exactly what private company they will invest in when they put their money into a SPAC.
Because of this, private companies seeking to go public can use SPACs as a path to the markets without the rigorous scrutiny and checks of an IPO. This has led to some companies with poor finances being overvalued and creating a financial mess in their wake. For example, a recent SPAC ATI Physical Therapy Inc. had its earnings debut as a public company, unfortunately, the company reported revenue greatly lower than projections as well as larger-than-expected staff turnover. The company even had some explanations missing in their released papers for why the company’s original guidance ever made sense. ATI Physical Therapy tanked 54% over the span of two days and landed itself on the hall of fame for one of the worst-performing companies to have gone public via a SPAC. The story clearly shines light on how with IPOs already being risky, SPACs are even riskier because of their lack of regulation. What do you think about SPACs? And would you ever invest in one?
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.