Position Paper 10 Feb 2022
SPAC Crib Sheet
What investors need to know before they invest.
This work lays out some of the complications of a SPAC structure and how to assess an investment either as a trading vehicle or a long-term investment strategy.
SPAC Crib SheetView the full article (PDF)
CFA institute releases a detailed crib sheet for investors interested in investing in Special Purpose Acquisition Companies or SPACs. With over seven hundred SPACs in various stages in the marketplace in 2022 and dozens more SPAC IPOs coming online each month, investors should be aware that competition is fierce. Most of these SPACs will be competing to find a merger target in order to complete an IBC.
There are a number of different approaches to investing in SPAC structures, and investors need to be sure they know the basics. Some approaches can be profitable and others a complete disaster.
The process typically involves a two-part process of raising capital from public investors in a SPAC IPO which is then used to invest in a private operating business that becomes a public company in what is referred to as the initial business combination (IBC). The result is two distinct phases to SPAC investing.
In short, traders can attempt to buy the SPAC shares for below $10 and later redeem them for $10 to play the risk-free yield opportunity. Regarding a longer-term strategy, investors can redeem the shares, get your original investment back in full and keep the free warrants as an upside bet on the new IBC. A riskier approach is to buy the SPAC with the intention of not redeeming and taking new IBC shares for the longer term.
The Crib Sheet stresses the importance of understanding that successful venture capital investing requires two things. a diversified portfolio of plausible business prospects (not celebrity sponsors or futuristic dreams) and a holding period of 5-7 years.
About the Author(s)
CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. CFA Institute works with academic institutions with the University Affiliation Program. Academic institutions that embed a significant portion of the CFA Program Candidate Body of Knowledge (CBOK)—including the Code of Ethics and Standards of Professional Conduct—into their curriculum may be eligible to participate in the University Affiliation Program.
An Affiliated University signals to their students and to employers that their curriculum is closely tied to the practice of investment management and is helpful to students preparing for the CFA® Program exams.