Along with the increased market volatility we’ve been seeing lately, another recent sign of market cooling is the (possibly) fizzling SPAC boom. No, that’s not the name of a sugary cereal or dive-bar cocktail – it has to do with how companies raise money for themselves on the stock market.
WHAT IS A SPAC?
Companies looking to sell a piece of themselves for quick cash will often “go public.” Traditionally, they do so through initial public offering (IPO), a rigorous process of documentation, marketing and SEC scrutiny.
Enter SPACs, or “special purpose acquisition companies.” SPACs are shell companies created for the express purpose of acquiring other firms and profiting from their success. While that may sound a bit parasitic, SPACs offer some major benefits.
WHY WE LIKE THEM
First and foremost, SPACs “go public” themselves before making an acquisition. In other words, they preemptively do the leg work of going public and raising capital so that the target company doesn’t have to.
Second, it frees them from the regulations involved – which then allows them, among other things, a lot more flexibility in hyping up their potential growth to attract investors and more time to focus on their core business operations.
WHY DO THEY MATTER TO YOU?
SPACs tend to sprout like weeds during golden opportunities of hot markets, low interest rates, and plentiful cash. As a result, SPACs have boomed throughout the last couple of years. But now they might be slowing down.
As you can see here, the incredible SPAC boom is starting to normalize. And as the Federal Reserve starts to get serious about raising interest rates, investors might once again be getting more interested in security than innovation.
This does not necessarily mean that you, as an investor, should get more defensive. But it does suggest that the recent ‘buy anything because everything goes up’ game might be ending soon. Very soon.