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Celebrity SPACs Versus the Good Ol’ S&P 500

Much excitement and controversy has been generated over the boom in SPACs over the past couple years due to the large sums of money placed behind the revitalized investment approach. In 2021, SPACs raised 162 billion dollars in the US alone[i] as compared to only 10 billion just three years before[ii].

SPACs, or special-purchase acquisition companies, raise money in initial public offerings from investors without actually revealing how they plan to deploy it, and then trade on exchanges—often at high multiples—with nothing more to offer investors than cash in the bank and the promise to someday invest it wisely.  Eventually, the SPAC will buy a private company or two, and shareholders in the resulting public company will have, in theory, a viable business in their portfolios.

But, with so many SPACs currently on the market, they’re having a hard time raising the cash needed to fund whatever mysterious purposes they plan for it. The result? some of the offerings have cast around for celebrity names to attach to their ventures—and you can probably predict the results.

But, of the 33 SPACs tied to famous figures, 21 posted negative returns for 2021.  If an unlucky investor had invested alongside all 33 celebrities, he or she would have experienced an 11% drop in value. Meanwhile, during the same time period, the boring S&P 500 index was churning out a 27% gain—before dividends.

SPACs not lynch-pinned to a celebrity figure didn’t fare much better. In fact, the DeSPAC Index, which is tracking 25 companies that went public by merging with a SPAC, is down more than 40% this year.  A broader IPOX SPAC Index of 50 SPACs that have made purchases and some that have not, is down 16%.

Like any other investment, there is inherent risk investing in SPACs. And even though SPACs as an investment choice have become more popular over the years, it may be difficult for the long-term investor to justify holding these investments in their portfolio, especially given their recent performance numbers, celebrity-backed or not.

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