The Great SPAC Scam: Why SPACs Are Terrible for Most Investors

[@financialmodeling]

A response to some of the feedback and criticism in the comments here: www.mergersandinquisitions.com/great-spac-scam/ The bottom line is that yes, there are some legitimate companies that will go public and have gone public via SPACs, and sometimes they do work out well for investors. But I still believe the vast majority will not end well. Also, it is possible to launch and operate SPACs with better-aligned incentives, and I hope that does happen. But most of the ones over the past 6-12 months have not operated in a company/investor-friendly way.

[@slobodandjukic4549]

Great video. Excel always tells it all. This is first excel ever made on SPACs so all credit to you. However, I would debate that you are missing important point; In slides SPACs "promise": 1. Easier, quicker road to the public markets and 2. Lower fees You are arguing that Yes, its quicker road, but fees may be higher, not lower. That's okay, but... you are ignoring (or forgetting) LIQUIDITY that public markets provide in comparison to PE fundraising approach. One illustration; all that Cathy Wood is cashing on currently is LIQUIDITY. The Ark funds are total garbage and will probably lose more than any SPAC, Masa Son, etc. For Gods sake she is assigning $500bn of her Tesla valuation to Robotaxis that she claims is based on $7trn TAM. That's $1000 per World capita and Avg Annual Salary in the World is $3000. Do we really think that every person on the planet will on average spend 30% of their income on Robotaxis in next decade? All other stock valuations in her Etfs are similarly bubbled and I see its 150% return over a year slumping to 50% loss in NTM. Masa Son lost $20bn+ in like a year and said "I made bad investments, I am really sorry" ))) I just wonder what dumb apology will Cathy give. My point is; there is so much LIQUIDITY in the system that any story that people like to hear sells on. So the name of the game is; GET IN QUICKLY. To me, getting in quickly is not necessarily a SCAM. SPACs provide you with Get In Quickly game and so they could be SCAMs as your LTM returns slides suggest but not all of them are. Lets put it this way; when Bill Ackman raises funds through SPAC, its no different than him raising PE funds. He is bringing in his track record and promising performance based on that record. Draftkings is another good (No SCAM) SPAC example. Draftkings has bigger TAM then Tesla does and already has higher market share than Tesla, yet Tesla is $800bn ($600bn now) and Draftkings is $25bn market cap. Draftkings should be $100bn and Tesla should be $25bn. So I favor SPAC here, rather than Tesla. How would you confront Draftkings here? On the other side, when Shaq is raising funds through SPAC he has no track record like Ackman to back it up. He may have some average Investment Manager behind him like A-Rod just had one for $500m raise. So people (retail investors) should think twice who are they giving money to. My conclusion would be; In order to be part of this ones in a century LIQUIDITY opportunity, why raise funds privately and miss on wider audience and why raise funds through IPO and lose time when you can do a SPAC!? SPAC is not a SCAM, its just a more costly (according to your model) shortcut to higher liquidity spurred returns! One can argue that playing on liquidity is gambling, not investing. I would ask; does Tesla represents an investment or a gamble? SPACs are just fine, just be careful who you are giving money to.

[@financialmodeling]

@@slobodandjukic4549 OK... and? You could make the same argument about virtually any other bubble asset, meme stock, etc. It's kind of like the dot-com bubble: yes, there will be a few legitimate companies, but most will go nowhere or will result in investors losing money. And in terms of the liquidity benefiting companies that go public via SPAC rather than IPO or direct listing: if the company is built to last, it doesn't need a burst of artificially high liquidity. It will thrive regardless of the capital markets.

[@jagatdave]

@@slobodandjukic4549 very well explained...one more thing...is it possible to know the numbers of days which a company can save through spac instead of IPO...

[@jagatdave]

So retail investors get a chance to invest into successful investor's fund...and as solobodan has mentioned in comment section...they want to dump these shares early before liquidity party ends...

[@jagatdave]

@@financialmodeling the investors who want to lose money are rich people...who wants to be richer quickly...they are ready to gamble...btw..for innocent retail investors...I hope there would be some SEC guidelines in USA

[@jamesw729]

Quality as always. Perhaps the only content creator on social media who knows what they're talking about... You deserve far more credit.

[@financialmodeling]

Thanks for watching!

[@oldJimmyWales]

Definitely. There is a huge dearth of institutional quality content on social media. M&I goated for this stuff

[@financialmodeling]

​@@oldJimmyWales Thanks for watching!

[@SKSoda]

Thank you, the way you explain SPAC with spreadsheet is superb.

[@financialmodeling]

Thanks for watching!

[@KaiChenoz]

SPACs are designed to transfer wealth from investor to the SPACs promoter. 20% of the assets are transferred to the promoter on the day SPACs acquire a company.

[@financialmodeling]

Agreed!

[@BG-bt5mv]

I believe the entire drama is around the ability to participate in IPO vs be able to buy spac before merger to get the gains on the merger news. I enjoyed your analysis of the Risks of the SPACs.

[@financialmodeling]

Thanks. Yes, that is the core issue.

[@user-ql3ws5uz1d]

Great video. Used to work in the industry and this mania exemplifies everything that's wrong with the industry...

[@financialmodeling]

Thanks for watching!

[@hebexu5092]

SPAC can use $300 million of cash to purchase the private target. Those $300M cash goes to the target company's existing shareholders?

[@financialmodeling]

Yes

[@jimlarocca1575]

One thing I haven't seen addressed in the SPAC mechanism is the repricing of warrants after listing. What are the implications of a reprice of warrants. I recently saw a filing where an initial investor's warrants were repriced at 50% of the original price. Since one of your points is that sponsors/initial investors get an outsized return for minimized risk, doesn't this exacerbate this issue?

[@financialmodeling]

I'm not sure about that one because I haven't really followed SPACs since last year when they were The Next Big Thing and then crashed and burned (as predicted here). If the warrants are repriced at 50% of the original price, yes, that makes the problem of outsized returns for minimal risk even worse and even more lopsided against normal/retail investors in the deal.

[@jimlarocca1575]

​@@financialmodelingThanks for the reply. What was even more curious was that the stock price had held at 7 (from 10) for the 6 months following listing, then 3 months before the repricing, the listed stock price dropped 50%, (to 3.50 with good news flow) then rose back to the original listing price (10) after the repricing.

[@WallaceRoseVincent]

Appreciate the honesty and analysis. And you would think Bloomberg would be all over this explaining this.

[@financialmodeling]

Thanks!

[@WallaceRoseVincent]

@@financialmodeling Could you review Bloomberg's "Here's How SPACs Work and Why They're So Popular" ... Could you do a video on why this is misinformation. I see it now but watching you and them is like night and day. They point out ackman, robins, chew, Blackstone like they are looking to create a fund to seek out new profitable ventures. Is the distortion in markets this bad?

[@financialmodeling]

@@WallaceRoseVincent I just looked at it. They're just not doing any critical analysis - it's all surface-level "facts." They're not pointing out the downsides of SPACs, such as the increased dilution. Look at the FT article and even Ackman admits that SPACs are so lucrative because of the 20% promote.

[@WhiteCarBlackWheels]

this is an awesome, clear explanation of SPAC v IPO fundraising. i learned a ton from you today (as always) and appreciate you sharing with us. this is probably one of the most positively-publicized 100% legal scams of the early 2020's.

[@financialmodeling]

Thanks. Agreed!

[@deez994]

Hey so how does a hedge fund invest/trade SPACs??

[@financialmodeling]

They buy shares when the shares are initially $10 and then sell when an acquisition is announced and the share price jumps up (temporarily). Buy the rumor, sell the fact. There are more complicated methods, but this is a simple one even retail investors can use.

[@eagerbeever22]

Great content ! Very well reseached & put together with a nice flow to it. Absolutely loved it ! The best 👌 & most informative video on SPACs !

[@financialmodeling]

Thanks for watching!

[@timpeyser2512]

Awesome, glad to see a video actually discussing some of the mechanics and transaction structuring of SPACs. Maybe you could discuss the changes you'd like to see to make this to be a "better" listing process (e.g. writing out the promote, quality sponsor, indication of target industry etc.) and the positives from a devil's advocate perspective ("locking in" valuation, expedited timeline (for target), public promotion of acquisition). Michael Cembalest has a good piece on SPAC performance too.

[@financialmodeling]

We will address some of those points in an upcoming article.

[@wenkaiyang1487]

Sponsor gets 20% of shares? don't they get shares based on the proportion they contribute? How does it work?

[@financialmodeling]

It depends on the deal, but generally the sponsor gets 20% of the shares for free because it was their brand/reputation that allowed the SPAC to raise capital (allegedly). Of course, SPAC deals are probably going to change soon, so...

[@SFEducationOfficial]

This is the best technical explanation of SPACs! Hope you dont mind if we translate this video into Russian and make an article out of it (references saved) to show it to the audience

[@financialmodeling]

Thanks. Sure, feel free to, but please link back to the original.

[@cryptobuzz1680]

Such a brilliant and simplified video, keep up the good work!!

[@financialmodeling]

Thanks for watching!

[@danielchristen7494]

Great video! Just curious, why SPACs themselves are allowed to be publicly traded, while at the same time avoiding the IPO process, in which other companies have to go through in order to be listed (thus, why is it easy for SPACs to be publicly listed)?

[@financialmodeling]

Thanks. They can avoid IPO scrutiny because they're literally empty holding companies, so there's nothing for the SEC to verify and nothing for the auditors to audit. They basically tell investors, "This company has nothing. You are buying shares in an empty company, and the money could just be returned to you, or they could spend it on an acquisition, which you may or may not approve of. Be aware of the risks."

[@viacheslavsavateev6522]

@@financialmodeling I thought it's called "blank cheque company" ...

[@ProfAzimov]

@@viacheslavsavateev6522 Same thing

[@hvbris_]

Never realized BIWS had a KZbin channel! I am so stoked!

[@financialmodeling]

Thanks for watching!

[@user-or7ji5hv8y]

Great video! Deserves a million views. Kind of like the crypto ICOs with celebrity sponsors. There seems to be too much money, now chasing after even bad investments.

[@financialmodeling]

Thanks. Yes, it is a massive bubble. Only question is how much further it inflates before bursting.

[@jamesmanning-coe6385]

Do you have an idea of how this would look like with over-allocation option exercised by the IPO underwriter assuming that founder / promote is forfeited?

[@financialmodeling]

Sorry, I do not. This was just a simple demonstration of the standard assumptions.

[@dominikdegen3105]

A quick question on your model: Why do you model the SPAC merger so that the Target Company Shareholders only receive 130M shares instead of 160M. At the end of the day, the pre-money value of the target is USD1,600M (and therefore target shareholders would request 160M shares) and the "value" that is brought in by the SPAC and PIPE is USD300M (but 35M shares). So USD2,000M (minus transaction costs) should be the size of the pizza and 195M shares is how you distribute it. The question now is who implicitly pays for the founder shares (which essentially is everyone who brings something of value (i.e. cash or target shares)), correct? [EDIT: It should be USD 1,900M instead of USD 2,000]

[@financialmodeling]

Why would they receive 160 million shares? The SPAC already has $300 million in cash it can use to purchase the target's equity. It would not be rational for the SPAC to keep the cash and issue 160 million shares rather than 130 million to the target company when cash is cheaper than stock. The target's Equity Value is $1.6 billion as-is, and the $300 million of cash doesn't affect that value.

[@dominikdegen3105]

​@@financialmodeling You have 300M USD (35M shares) as the equity value of the SPAC (which is all cash). Then you add USD 1,600M (which translates into 160M shares at 10 USD) as the equity value of the target company (= "pre-money valuation"). Combined it's 1,900M USD (sorry, there was a typo in my original post). Now the combined company is public and has another 300M USD to burn (assuming that the cash is not used to paydown debt or buy shares from target shareholders which is quite often the case). I would say this is how it usually works :) But your case probably works as well when you have a mature company and you can use all the cash to pay exiting shareholders.

[@mathiashammar1]

Thanks for raising awareness to everyone in this subject and sharing your knowledge. Enjoyed your presentation.

[@financialmodeling]

Thanks for watching!

[@carveout2512]

Hi Biran, Love your videos. Just wanted to point something out I noticed playing around with your model. If you change the size of the SPAC deal, to something like $300mm, the Enterprise Value of "How it Should Be" doesn't actually = 0 anymore. If you change the primary share issued to 30mm such that the new IPO dollar value = $300mm, the Enterprise Value increases from 0 to 3mm. Maybe it only = 0 for a $200mm deal because that's how the algebra worked out. Interested in what you think.

[@financialmodeling]

Yes, it's not intended to be a robust model, just a simple example. In reality, other variables would adjust when you change the size of the SPAC deal. I skipped it here due to time constraints.

[@AEY00771]

ThIs is an excellent presentation. Kudos!!!

[@financialmodeling]

Thanks for watching!

[@tottenhamfan9717]

What are your thoughts on the traders who buy SPACs at $10 a share, then sell pre-merger. What do you think the risks are in that strategy?

[@financialmodeling]

The risk is that many SPACs trade down before the merger, and there's no way to tell what type of company most of these SPACs will attempt to acquire... or the multiple they'll pay... and so on. It is essentially a slot machine.

[@GiacomoTomassi]

Great Content! Confused when you say that the "Sponsor" gets a huge % for putting up nothing but in your excel you reference that they put up $6M to get $48M

[@financialmodeling]

"Nothing" is an exaggeration, but contributing $6M to get $48M (or more) instantaneously is close to "too good to be true." Imagine if you could buy 100 shares of Microsoft and then get another 700-800 shares for free.

[@YumboDumbo]

Very good and insightful video and I completely agree that there is a risk with SPAC setup compared to traditional IPO. But if you look at the essence, the investor wish to get return of their investments as soon as possible. Even though that SPAC may deliver smaller yied than traditional IPO, it takes less time to setup SPAC up and go public which mean less time for investors to wait for their return. SPAC has a commitment to deliver the promised return to it's investors and sponsors within s 2 years period. And if you as investor know that the sponsor has a trackrecord of success in other businesses, most likely might put your bet in that basket. For example, if Elon Musk would go SPAC with his next venture, would you invest? If not, why?

[@financialmodeling]

Yes, it's possible to launch and run SPACs ethically as well, but the fact remains that most of the ones launched in the past year do not fit that profile because of their terms. No, I would not invest in an Elon Musk SPAC because I do not trust him. Look at all the controversies surrounding Tesla, Solar City, etc., and how he pumped DogeCoin.

[@Space_Investing]

Could you do the same for PSTH it's kinda unique. I'd like to hear your thoughts

[@financialmodeling]

It was discussed in some of the comments here and in the pinned article. There is no Founder Promote, so it's unique and better than other SPACs.

[@davidinmoscow]

Great video. My view on the EV of the SPAC post-IPO is that this represents the option value of what the SPAC and sponsor can do. As you point out, this option value is not there in the traditional IPO. Is it a great deal for the sponsors? Yes. These are the same investors who would get early access on a final private round or IPO. Is a SPAC a good investment for a retail investor? Maybe. I view it as an asset class itself, and it is entirely dependent on the strength of the sponsor. Over the past 40 years investing, I've seen lots of deals anchored by the participation of celebs. The people behind those deals determine their success, not the participation of X celeb.

[@financialmodeling]

Thanks. Yes, SPACs clearly favor the sponsor over all other parties... so some SPACs will succeed, sure, but the chances are lower if you're a retail investor. Just look at the performance in 2021 YTD.

[@TheGwatt]

Great video, very informative. Though I believe you're downplaying the value brought to the table by the sponsor in these type of deals; considering how they play an essential role in raising the equity, while identifying Private [target]companies, and do the necessary due diligence on each potential target company. In addition to this, i didn't hear you mention how the capital the sponsor helps to raise is parked in a trust until the target company is identified, and backed by a (low yield) bond until the merger/aquisition is voted upon.

[@financialmodeling]

The second points were all mentioned in the video (not going to pull the time stamps, but look at the table of contents). Sure, you could argue that sponsors do some amount of work / possibly add some value, but how much is it worth? Should they really get 20% of the SPAC in exchange for almost no upfront investment? Many of these companies do not need a SPAC to go public - they could also use an IPO or direct listing. Or they could just aim for an acquisition. So it's difficult to see why a SPAC is so much better than the other options that it justifies the dilution.

[@johannesredinger2682]

Great video! Would a potential Forward Agreement work similarly as the PIPE?

[@financialmodeling]

It's not my area (we don't cover sales & trading-related topics for the most part), so can't comment on that one.

[@stoicroman9423]

I agree. But it is still better than ICOs which don't even give the investor any direct ownership in the company

[@financialmodeling]

Yes, but you can't really compare crypto anything to normal assets (unless you want to do so in a negative way, of course...).

[@noor-hj4fn]

Hey Brian, I hope you’re well. I’m a first year in London who just done a spring recently who failed to convert. I follow you immensely and I’m honestly kind of desperate to talk to someone - do you have like a support service that you do? I won’t mind paying

[@financialmodeling]

Sorry to hear that. We don't offer coaching/consulting for spring weeks or general recruiting currently, but my advice is to keep going and focus on winning other internships because spring weeks are not as important as people on the internet seem to believe. The biggest question you'll have to answer is why you did not win an internship offer out of it, but there are plenty of ways to answer that (the group wasn't hiring, poor deal activity, you didn't meet their exact requirements, etc.). The most important point is to avoid dwelling on this too much and just keep applying to other roles with a very short story in-hand to explain what happened. Resist the urge to over-explain, as that will make it sound less believable.

[@noor-hj4fn]

@@financialmodeling Thank you for giving a detailed answer. It’s been a week so I’ve sort of calmed down and had time to think things through. I did well in my technical component thanks to you but I spent little time focusing on competency questions, it caught me out. Keep up the amazing content though- I’m looking to practice building financial models in my holidays and applying the knowledge I learnt from you!( & practice behaviourals in the meantime…)

[@chonglongchoo]

What happened to retail shareholders if SPAC couldn't make any acquisition within certain years and the sponsors dissolves SPAC?

[@financialmodeling]

They get their money back, plus whatever low amount of interest it accrued.

[@jagatdave]

@@financialmodeling would n't value be 5% down since sponsors own 5% in SPAC

[@financialmodeling]

@@jagatdave Depends on the terms of the SPAC, but generally if it dissolves without doing anything, the retail investors get back their cash contributions, which the company held on its Balance Sheet.

[@jagatdave]

@@financialmodeling btw...has it ever happened in case of SPACs that promoters have given the money back and said that they could not find any good investment???

[@financialmodeling]

@@jagatdave Yes

[@RL-os2zj]

What do you think of NGA (Lion Electric)? Real company but down with the SPACS

[@financialmodeling]

Sorry, don't know enough about it to say anything useful.

[@shashankke250]

Thank you so much Such quality content.

[@financialmodeling]

Thanks for watching!

[@davidsera6575]

Great video! Love the content! I'm actually working a thesis paper on SPACs and loved this introduction. Was wondering about where you were able to get your data in which you based your analysis and conclusion? The paper in the end was not in the description, I would love to follow up on that as well. Also, have you looked at SPACs that happened 10 or 20 years down the line? They were also very popular at 2007/8 and died down afterwards. Any idea what happened with those firms?

[@financialmodeling]

papers.ssrn.com/sol3/papers.cfm?abstract_id=3720919 corpgov.law.harvard.edu/2020/11/19/a-sober-look-at-spacs/ I did not look at SPAC performance going back to 2007.

[@davidsera6575]

@@financialmodeling That's awesome, I've actually come across this paper myself and have read it. Thank you!

[@bbjToast123]

I am also doing a Master Thesis on SPACS. I am looking a the entrepreneurial aspects of SPACS. Any chance I can look at your thesis? :P

[@XOXO_BangBang]

Thank you for your work! I have a small off topic question. What the tool do you always use to highlight the screen area in excel and pdf files (by blue squares)? It looks extremely useful to present any ideas or calculation's logic especially during distant work.

[@financialmodeling]

This is part of Camtasia Studio, the screen recording software used here.

[@The_ECO_channel]

We just subscribed to your channel. Great content! I understand SPAC may not necessarility be a great deal for retail investors but how about new company seeking easy funding? We are a new company considering being acquired in a SPAC deal. In your opinion what are the pitfalls (or plus) of being acquired through a SPAC? For us giving up 20% equity to a venture firm or a sponsor to raise capital does not make a big difference unless I am not comprehending fully what is at stake.

[@financialmodeling]

We don't advise companies on these issues, sorry. You should really speak with a lawyer, banker, or other financial/legal adviser. This channel is intended to teach students and career changes about accounting, valuation, and corporate finance.

[@thor9n717]

Honestly, I don't get the comparision with the IPO, since they're not the same thing. In an IPO you invest in the belief that the company will perform well; investing in a SPAC is investing in the team to perform well in acquiring companies. What am I missing here, other than you don't approve of bad investing?

[@financialmodeling]

The point here is that in an IPO, you have a significant amount of information on the company before investing. You can read the filings, look at market research, see the historical financials, etc. With a SPAC, you have 0 information on the potential acquisition and are essentially just betting on the team and its ability to find a good deal, which is tough unless the team consists of well-known dealmakers and executives with a long track record (much less likely for SPACs - why would anyone good sign up for something that speculative?). Anyway, the SPAC market crashed, I don't think anyone cares about it anymore, and I'm not sure why I'm still explaining these points in a video that was made during the height of the craze.

[@PeterXian]

I believe the sponsor would have a lot of incentives to do a deal rather than de-spac even when there’s no good deal out. That means a bad deal is better than losing a few mil on warrants. Would be a nice sugar coated merger so at least the sponsor is going to be compensated enough with the promote and not lose out. What a scam setup indeed.

[@financialmodeling]

Yes, exactly. The sponsor has an incentive to do *any* deal, even if it's a bad one or they overpay by a ridiculous amount, because they come out ahead as long as the share price falls by less than ~90%.

[@outsideofwork496]

Great content, very insightful! Could you comment on the "SPAC pop" vs "IPO Pop"? SPACs should provide target companies with a fair-er valuation?

[@financialmodeling]

I don't think SPACs necessarily offer companies a more appropriate valuation because their offer prices are often based on highly inflated private market values. It's true that many IPOs are mis-priced as well, but if SPACs offered more appropriate valuations for companies, the performance since 2019 would be better.

[@dong6906]

Thanks we need more people like you

[@financialmodeling]

Thanks for watching!

[@yo2131]

What do you think about $ALUS?

[@financialmodeling]

I don't know, have not looked into it at all.

[@yo2131]

@@financialmodeling Got you! I just really wanted to pick your brain. If you can look into the stock that would be awesome!

[@financialmodeling]

@@yo2131 Unfortunately, I can't spend hours analyzing stocks out of personal interest at this stage - I am running a business and dealing with client/personnel issues all day. I barely have time to publish anything on KZbin anymore, let alone write additional free content. I will keep this idea in mind and see if we can use it in a future case study.

[@cyrus6501]

Are there also SPACs which are actual good companies?

[@financialmodeling]

Potentially, yes, but you have to question the quality of a company that would choose to go public via a SPAC rather than an IPO or direct listing. Why give up so much of the company just to save a few months of time in the process?

[@KobiPresents1]

Beautifully done! This video is timeless, thank you for making it.

[@financialmodeling]

Thanks for watching!

[@rs9301]

Do you realize the Sponsors payoff looks like a call options payoff..that 3%& 3% Fee would look like "call option" premium, if there is a upside they get to enjoy the upside with that the limited amount and if the deal doesn't go through they lose the premium (I don't think they will let that happen, do you see the conflict of interest ) . Few points that came to mind after listening to your discussion. 1-I think SPAC is a better vehicle when a company wants to go public quickly, just to time the market, like when the markets are more rewarding (bullish) just to get benefits of higher valuation (pricing). 2- Sponser like Bill ackman, Chamath who have some track record in the investing world as they are followed by general public we would see more SPAC deals from them as the payoff is skewed. 3 It would take some time for the regulator to wake up until people start losing large sums of money. Thanks for the video explanation.

[@financialmodeling]

Yes, it's similar to a call option. But the difference is that the magnitude here is so much bigger that sponsors can become wealthy from almost nothing, whereas with options, you really need to know what you're doing to trade successfully. SPACs may be better for companies that "need" to go public quickly, but I'm not sure how many companies really fall into that category. As with all asset classes, sure, some professional investors will do well, but the majority of SPACs will dissolve or perform poorly.

[@rs9301]

@@financialmodeling 👍👍👍

[@patrickzen1130]

Great explanation on SPAC tricks

[@financialmodeling]

Thanks for watching!

[@kasturavadas697]

The onlY way to make money in SPAC is to launch one or more of them yourselves and not be the retail schmucks buying their stock

[@financialmodeling]

Agreed. If only we could all be famous like Shaq or one of these other celebrities...

[@TyKOmain]

You sound mad that you don’t own, DKNG, SPCE, QS, OPEN, SKLZ, and many more successful reverse mergers.

[@bihmthethird]

@@financialmodeling Is there a market for launching SPACs, and who are the people/companies looking to acquire a SPAC?

[@financialmodeling]

@@bihmthethird Well, there is obviously a market because SPACs keep launching and people chasing returns keep buying them. The real question is, what happens to all these SPACs that launch and never go anywhere after 1-2 years? They'll just dissolve or overpay for private companies for the sake of "doing a deal."

[@j.franciscox3318]

Thanks for the news letter, my investment 5 years ago still pays off...

[@financialmodeling]

Thanks!

[@hamzariazuddin424]

Surely there is more going on there then someone putting 25,000 in and somehow 2 years later their promote being worth 400million? someone please give some more insight...they must have put in some more money at some point. Does the promote include warrants they may have paid for along the way?.....I find it hard to believe 25,000 to 400million in 3 years is possible unless its some ridiculous crypto currency? thats a 16,000x on their money?

[@financialmodeling]

No, that is really all there is to it. Yes, they may contribute more money along the way, and the exact numbers may differ from the ones shown here, but SPACs really do provide ridiculous asymmetric risk/return for the sponsors and a much worse risk/return profile for the retail investors... which is why the entire market is now cooling off.

[@hamzariazuddin424]

@@financialmodeling Yeh crazy....sounds like a huge free lunch. So what exactly is inducing the other parties to get involved. They take a slightly lower post deal stake in the company in return for speed to market? Also people have been saying through this process they are guaranteed a price, whereas in the IPO (traditional) they are subject to possible volatility. I personally sense it is a sign of euphoria but the market keeps soaring upwards. The markets today make no sense to me. But then again I am not in the business of investing. A lot of crazy valuations that make no obvious sense. People keep saying its a function of Central Bank Policy and liquidity provisions but surely that cant explain why people are taking on so much risk.

[@johngui8084]

with all the SPAC, crypto-currency, and just an overall high-valuation market seems like a warning sign for a possible market correction. Great video, very informative.

[@financialmodeling]

Yes, agreed. "Low interest rates" do not justify this type of mania.

[@armitageshanks2499]

Damn lol this is such a good contrarian view that aged so well. If Brian were a HF manager he'd make a killing with his foresights. Why's this guy so smart

[@financialmodeling]

Thanks, but I think it was fairly obvious that SPACs were a scam. It's not something like Herbalife where it's sort-of-kind-of-a-scam but in more of a grey area, with big moves up and down over time. You could certainly make money with SPACs by buying the rumor and selling the fact and using leverage, but I don't really like short-term/speculation strategies (hard to pull off when running a business full time...).

[@freshpistachios275]

The Real Question now is, how do I start a SPAC for $25k and become a multi-millionaire Brian??

[@financialmodeling]

Start by building your fanbase on OnlyFans and go from there. Eventually, try to cause some type of massive controversy that makes you famous, and then keep leveraging your way up to become more famous as a result of already being famous.

[@cryptobuzz1680]

@@financialmodeling well there tons of onlyfans account, you need to do something crazy in the public.

[@aron2971]

Aasome Bro respect

[@financialmodeling]

Thanks for watching!

[@sngs9565]

TRUE & AGREED!

[@financialmodeling]

Thanks for watching!

[@davidmoore7856]

As an actual spac warrant investor, I wanted to give this a shot...but it is so poorly done. Yes, there are bad spac deals out there, and too many spacs, certainly. But the assumption that Spac Sponsors are random CEO's, or bored people, or celebrities who do nothing...shows this reviewer knows very little. I welcome honest, and good feedback and critical thinking on this topic....but this video strikes out at its premise. Just one guys opinion. You can do much better than this.

[@financialmodeling]

The problem isn't "who" these SPAC sponsors are. Those comments were intended to be tongue-in-cheek because of some of the high-profile but unqualified people launching SPACs, which happens in any bubble. The problem is that most SPACs offer terrible terms for normal investors and they give significant downside protection to the sponsor while giving little to none to normal investors. Yes, I agree there are some exceptions, but if you look at industry-wide performance data, it's a bleak picture.

[@jagatdave]

Are not you worried that liquidity will stop and spacs will lose value??

[@Hello-zf5lq]

So SPAC is the subprime mortgage product sold to clueless retail investors in this overvalued market and the reason a company goes through a SPAC is because they would get listed as a penny stock due to IPO protections which are missing in a SPAC

[@financialmodeling]

Yes, pretty much. There are some exceptions and higher-quality SPACs (see the pinned comments), but most SPACs are to be avoided.

[@daljitkaur3233]

Great to see rich greedy people scamming the average Joe. Greed and greedier.

[@financialmodeling]

Yeah, I wonder what they'll come up with next...

[@TacoEqualsFtw]

Bill Ackman's PSTH should be separated from the other SPACs mentioned in the intro. The tontine structure is incredibly investor-friendly. PSH is investing over $1B of its own money. Moreover, Pershing Square is not taking ANY founders shares. This means no 20% dilution for other PSTH shareholders. The only compensation provided to the sponsor (besides PSH's $1B in equity) is a 6.21% promote after the investors have already received a 20% return. PSH purchased these warrants for $67.8M.

[@financialmodeling]

OK, yes, that may be an exception if they do not have a promote at all. But most SPACs do not operate like that.

[@jagatdave]

How do u do so much research

[@kemicraig9660]

@@jagatdave Read Top banking,Consulting,Law Firm reports , Mainstream financial news, watch videos from financial magnate who done it and you become an overnight guru on the subject matter just by filtering your research to the world "SPAC"

[@Niklas-nt1hk]

I love how every usual video on this channel is serous af but when it comes done to SPAC’s it feels like this is some sort of Reddit forum

[@financialmodeling]

Yes, now look at average SPAC performance over the past year and ask who was correct.

[@brandonjacobs5452]

Aren't the majority of SPAC investors hedge funds who leverage money put into SPACs not gullible public investors?

[@financialmodeling]

Some hedge funds invest in SPACs, yes, but plenty of retail investors also bought in during the boom years of 2020 - 2021. Remember how everyone was "getting rich" from day trading? Anyway, I would recommend reading or watching the subsequent SPAC coverage on this channel or on M&I because we've released a few updates on this topic by now. At this stage, SPACs may not even be relevant again for a long time.

[@kirbyman1kanden7pf]

QuantumScape in a nutshell

[@dmytrokovalchak4814]

I am genuinely disappointed with the quality of this video, and I am a customer of BIWS, so I know what is the "normal" quality level. Opinion presented here is one-sided, and clearly ignors qualified sponsors bringing good assets to the market. Although, SPAC can circumvent some scrutiny of the SEC it can't completely bypass it. Promote is not money for nothing it is money it is money for the work sponsors put in to find the target and negotiate a deal, and although in your example incentives are misaligned there are spac teams which are trying to align the interest of everyone. Also, spac sponsors have no access to the public fund until aqusition (aka De-SPAC) takes place, and yes there is an opportunity cost of holding money in the trust account for a number of year. Pricing of SPAC is off a bit (5.5% vs 6%) but it is still cheaper than 7% IPO fees.

[@financialmodeling]

Feel free to disagree. I would bet half my net worth that most "normal investors" in SPACs will end up disappointed, and that most companies that go public via SPACs will end up being lower-quality than the ones who go public via normal IPOs or direct listings. We'll see how SPACs perform over the next 5-10 years, if the current boom even lasts that long. Saving 1% or 1.5% total on fees is a terrible reason to accept a 20% "promote" that dilutes the company more than a traditional IPO. Even if you argue that a 20% promote is "payment" for finding and negotiating a deal, it seems like a ridiculous amount to pay for a *single company* - vs. paying 20% carried interest to PE funds that do the same thing over many years for many companies and also do something to improve the businesses over time.

[@dmytrokovalchak4814]

Thanks for the reply

[@user-ql3ws5uz1d]

I wonder who works as a banker?

[@dmytrokovalchak4814]

I am not a banker ;-)

[@yangwang6665]

global gullible

[@financialmodeling]

Yup, that's a good way of putting it.

[@kurtleimkuehler]

Should be illegal

[@kurtleimkuehler]

It’s possible they survive if the company can actually produce earnings. If

[@financialmodeling]

Well, to be fair, the market did crash this past year... not quite as good as illegal, though.

[@thedudeiam9324]

This is such trash. You haven’t taken time to learn about many great companies of future coming public via SPAC.

[@financialmodeling]

Did you see the pinned note and all the other comments here? Yes, there will be a few legitimate companies that go public via SPACs. Doesn't change the fact that the vast majority of SPACs will go nowhere and result in nothing for investors. Look at the actual performance data for 2019 and 2020 in the papers. Yes, the dot-com boom gave us companies like Google and Amazon... along with thousands of others that flamed out and died.

[@jagatdave]

Be careful...spacs may not be scam..but liquidity is a real scam

[@kirbyman1kanden7pf]

QuantumScape in a nutshell