CFA Institute: Be an Informed SPAC Investor

CFA Institute, the global association of investment professionals, today issued a detailed guide for what retail investors need to know about investing in Special Purpose Acquisition Companies or SPACs.

“There are a number of different approaches to investing in these structures, and investors need to be sure they know the basics,” said Paul Andrews, Managing Director, Research, Advocacy, and Standards at CFA Institute. “Some approaches can be profitable and others could lead to deep losses if investors are not careful.”

The process typically involves two steps: raising capital from public investors in a SPAC IPO, the proceeds of which are then used to invest in a private operating business that later becomes a public company in what is referred to as the initial business combination (IBC). This means that two distinct phases to SPAC investing exist.

The mounting numbers of SPACs already listed in public markets pose growing investor protection concerns. With more than 700 SPACs in various stages in the marketplace this year and dozens more SPAC IPOs in the pipeline each month, investors need to be aware that competition for assets to purchase remains fierce. Most of these SPACs will be competing to find a suitable merger target to complete an IBC.

“Investors need understand the key risks,” said Andrews. “Like any investment, we urge investors to perform deep research and analysis before investing.”

The SPAC guide lays out for retail investors the investment scenarios of complicated SPAC structures and how to assess a SPAC investment both as a low-risk return trading vehicle and as a longer-term investment strategy.

In short, traders can attempt to buy the SPAC shares for below $10 and later redeem them for $10 to play the yield opportunity. Regarding a longer-term strategy, investors can redeem the shares, get the original investment back in full, and keep the free warrants as an upside investment on the new IBC. A potentially riskier approach is to purchase SPAC shares with the intention of taking new IBC shares for the longer-term investment prospect. Here the guide stresses the importance of understanding that successful venture capital investing of this type requires two things: a diversified portfolio of plausible business prospects (i.e., not celebrity sponsors or futuristic dreams) and a holding period of five to seven years. 

If investors truly understand how the SPAC structure works, they can procure low-risk returns in the short term and have an opportunity for upside with emerging growth companies. 

“Picking one or two SPACs on a whim and expecting to hit performance-gold quickly is more like buying a lottery ticket,” said Andrews “SPACs are not for the faint of heart or the uninformed, so we at CFA Institute urge investors to pay attention.”