Are you missing the boat in the PSPCs? Maybe it’s for the best

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When a house party gets a little too loud, it’s only a matter of time before the police find out. And when that party takes place on Wall Street, the Securities and Exchange Commission gets the call.

This appears to be the case for Special Purpose Acquisition Companies, or SAVS. So far in 2021, PSPC has raised $ 99.9 billion in initial public offerings, more than the amount of PSPC IPOs raised from 2003 to 2019 combined. This is the kind of explosive growth that is catching the attention of regulators, and indeed, the SEC intervened.

Now with the SPAC market spray you might be wondering if you haven’t missed it. But it’s possible that if you stayed by the side of the SPAC frenzy, it was for the best – the SPAC surge could well go down in the annals of the investment world as a short-term seismic event, alongside GameStop. , boom-and-bust cryptocurrencies and other hot investing trends.

So what did the SEC do? In a statement released earlier this month, the regulator presented new accounting guidelines for SPACs. And while it may seem minor, it is already having a profound impact.

The change will put additional stress on accountants working on PSPC deals and lead to a market downturn, said Yelena Dunaevsky, editor of Business Law Today for the American Bar Association and vice president of transactional insurance at the firm. Insurance and Consulting Woodruff Sawyer.

And maybe, she says, a downturn is exactly what the SEC wanted, given the size of the market.

What is a PSPC anyway?

A SAVS is a business that actually does nothing – it has no business and is called a “front” business. PSPC is formed by a management team known as the “sponsor”, who then sells the company’s shares through an IPO. Once the SAVS is a state-owned enterprise, it typically has two years to use the money it has raised to find and merge with a private enterprise (the “target” enterprise) that does indeed operate.

Why have PSPCs increased?

According to Iliya Rybchin, partner at global management consulting firm Elixirr, a confluence of events in recent years, including deregulation, excess available capital and a volatile stock market, probably contributed to the rise in power. But the thing to remember is that for sponsors, PSPCs can be a really good deal, says Rybchin.

If PSPC finds and acquires a target company, the sponsors often own 20% of the merged company for a price much lower than the average investor would have to pay for the same capital. Considering this, besides other factors, it is not difficult to see why the number of PSPC has become parabolic.

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Did I miss the mark on PSPCs?

With the inevitable downturn ahead, you might regret that you didn’t have the chance to add PSPC to your wallet. But if you look at the data, it may have been accidental.

In the short term, PSPCs are attractive. According to data compiled by Elixirr, investment in PPCS outperformed invest in the S&P 500 in the second half of 2020 and in December, the outperformance was significant. But these are the first stages of a PSPC – the post-IPO period. From there, PSPC still has to find a target to acquire, successfully merge and start operating as a real business. And that’s where the rubber really meets the road, says Rybchin.

“In theory, yes, the PSPCs are doing well. Everyone’s like, “Yeah, you’re going to buy a clothing business!” “Then in reality, they’re going to buy this clothing business, and they can’t deliver the efficiencies, the synergies, the cost savings, the growth,” he said. “You can no longer hide behind the veil of your thesis.

Elixirr data shows that between 2010 and 2019, the one-year post-merger average returns for earlier SPACs consistently underperformed the Russell 2000 Index.

“The explanation for this phenomenon is simple. Investors are rushing into a SPAC on the promise of big returns from famous SPAC founders, ”Rybchin said. “However, we have found that many of these PSPC leaders are not as practical as they used to be, lack the support to operate the businesses they acquire, and many of the promised benefits never materialize.”

So if you blame yourself for not buying into the PSPC hype, maybe a change in attitude is needed. You are more likely to have avoided jumping on a bubble that was about to explode. From the perspective of a world that is not dominated by SPACs, you may want to follow the proven advice of financial experts: Set your money aside in highly diversified investments, low cost index funds, make regular contributions through a dollar cost averaging strategy and focus on the long term, rather than chasing the kinds of investments that make the headlines.



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