Last year was a crazy market for many reasons, but one thing that really stood out was the IPO market.
The 2020 IPO landscape
The 2020 IPO market completely closed in the first part of the year as COVID uncertainty set in but then opened back up with resurgence in the second half of the year even as virus and economic risks remained.
The year actually closed out with IPOs accounting for over $300b raised globally and record-setting issuance in the US.
That was a significant and notable change compared to issuance just years ago. Back then, companies were choosing to stay private longer, opting instead to leverage venture capital and private equity dollars. In fact, according to a recent report out of Goldman, the number of US publicly traded companies in 2019 was at one of its lowest levels in twenty years.
So are we looking at a new era?
Maybe…especially as the public valuations of companies are soaring and we are hearing the dreaded “bubble” term popping up.
But wait, there’s more.
Adding to bubble talk are these things called “blank check” companies… or Special Purpose Acquisition Companies (SPACs). SPACs are existing publicly held investment vehicles, so essentially, they have already IPO’d.
A SPAC is set up to identify existing private companies, buy them (merge), and rapidly take them public. The rapid part is critical – since a SPAC is already public, the merger enables the private company to forgo the traditional and lengthy IPO underwriting process.
But for a SPAC to buy a company, the SPAC first needs to raise money from investors. This is where the term “blank check” comes from – they raise money in advance of finding a company to buy and are entrusted by investors to find a good deal.
Kinda like a Potluck Dinner.
The role of SPACs in 2020 and beyond
According to Goldman Sachs, SPAC “IPOs” comprised over 50% of the US IPOs in 2020.
And 2021 maintains the momentum since, in the first three weeks of 2021, 56 US SPACs have been brought to market.
With that background in mind, let’s address the “So what?” and if these are worthy of consideration in portfolios.
And of course, that depends – it always does.
If you are one of the pre-private merger investors in the SPAC, research out of both University of Florida and Stanford suggests these investors actually do well (on average).
BUT, if you are a post-merger investor…ehhhh, not so much. In fact, on average, these investors experience negative returns.
But look, there’s always the old “past performance is not an indicator of future performance,” and recent SPACs have indeed done better than those in the past. Still, I’m not sure they are a necessary component of an INVESTMENT portfolio.
Remember, wants and needs are two different things…and my opinion is that most investors don’t NEED them.
If you WANT them, ensure that you are buying them within the constraints of a designated “risk bucket” in your portfolio and consider naming it your “Luck Bucket.”
And as for us, well, we run rules-based portfolios, so if a model alerts us to sell something and surfaces a SPAC as a quality addition to a portfolio, we’ll consider it.
But don’t hold your breath…this chart speaks 1,000 words.
Keep looking forward,
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Capital Management, LLC [“Monument”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument.
Please remember that if you are a Monument client, it remains your responsibility to advise Monument, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Monument is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of Monument’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at https://monumentwealthmanagement.com/disclosures/. Please Note: IF you are a Monument client, please advise us if you have not been receiving account statements (at least quarterly) from the account custodian.
Please Note: Monument does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Monument’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your Monument account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Monument accounts; and, (3) a description of each comparative benchmark/index is available upon request.