Words: Tom Ward
Celebrity-backed SPACs are everywhere at the moment.
Not exactly sure what a SPAC is (celebrity-backed or otherwise)? Then let’s start at the start; a special purpose acquisition company (SPAC), also known as a ‘blank-cheque company’ is an investment vehicle that operates like a corporate shell in order to take a company public.
Why? Well, SPACs allow company owners to swerve IPO regulations which can make it easier to generate a lot of cash quickly. The owners of the SPAC will then use this cash to invest in another company.
There’s a catch, though. Most of the time, investors in SPACs won’t know what they’re investing in – likely because the owners of the SPAC haven’t decided what to do with the money yet.
As we put it in an article last year:
And it’s proving incredibly popular. In total, SPACs brought in $83 billion from investors last year (according to Bloomberg) while more than 40% of 2020’s IPOs were done in this way. The model is growing exponentially too; in 2021, SPACs have raised over $70 billion and counting.
With celebrities like Jay-Z, Ciara Wilson and Shaquille O’Neal (alongside Wall Street billionaires and athletes) publicly backing SPACs, the questions is how much weight should you give to, say, Jay-Z’s reputation as a successful businessman in deciding where to place your money?
Jay-Z’s helped to ink the largest ever cannabis SPAC deal
As an article on pymnts.com explains “People who put money into SPACs often have no idea what they are even investing in, gambling on the founder’s overall reputation and popularity.”
As we reported recently, Jay-Z certainly has the business nous to build a combined fortune of over $1 billion with his wife, Beyonce Knowles-Carter. But does that mean you should invest in a SPAC with his name on it? And, celebrity-endorsed or not, are SPACs simply another investment bubble waiting to burst?
Despite their recent headlines, SPACs are nothing new. In fact, they’ve been floating around in the technology, healthcare, logistics, and telecommunications sectors since the 1990s when the template was developed by GKN Securities founders David Nussbaum, Roger Gladstone and Robert Gladstone.
The beauty of SPACs is that in this new model, Nussbaum, and the two Gladstone’s created a way for companies to go public that otherwise might not be able to, and for sectors where financing might otherwise be scarce to generate funds.
And there’s cash to be made, too.
Notably, American hedge fund manager Bill Ackman backed a trio of SPACs in 2015 (to the tune of $350 million), one of which eventually took Burger King public. As part of a deal that also saw Burger King acquire US fast food company Tim Horton’s, Ackman was reported to have profited to the tune of roughly $1 billion.
More recently, Omnichannel Acquisition (OCA), raised $200 million earlier this year to focus on technology companies, while SPAC Ajax is focused on software and internet companies, and currently holds $750 million.
"Bill Ackman created a SPAC that helped Burger King acquire Tim Horton's — and took home $1 billion for his trouble..."
And despite being seen as a way around IPO regulations, SPACs still have to adhere to rigorous rules. Typically, each individual SPAC is watched over by a management team of three or more people with experience in private equity and/or mergers and acquisitions. This team will normally receive 20% of the equity in SPAC at the time of the offering. However, no salaries, finder’s fees or other compensations are able to be paid to the management ream before a successful business combination.
It’s perhaps unsurprising then, that SPAC’s are extremely popular in a post-Brexit UK. In fact, a March 2021 report prepared by Lord Hill on behalf of the Chancellor of Exchequer argued for changes that would make London-based companies more favourable to SPAC listings – including a proposal to reduce the percentage of shares that must be offered to the public from 25 percent to 15 percent. This, it is hoped, will encourage firms to do business with UK-based firms rather than with US or Europe-based rivals.
“We’re trying to make sure that the listings environment in the UK is as attractive as it can be to the growth companies of the future,” Lord Hill told BBC Radio 4. “If you look at our main index at the moment it is pretty heavy on old economy businesses and it’s much lighter on the growth businesses of the future, the tech companies, the life science companies and so on.”
In the UK at least, then, it appears the SPACs bubble is unlikely to burst any time soon. But the question remains, where exactly, should you invest your cash?
Investment commentator Jim Cramer described the Celebrity SPAC as “an in-joke for the super rich”
As of March 2021, it’s possible to invest in SPACs backed by everyone from baseball exec Billy Beane (immortalised by Brad Pitt in the film Moneyball) to former astronaut Scott Kelly and NBA all-star Shaquille O’Neal.
In short, pick a sporting or pop culture figure you like, and it’s likely they’re backing a SPAC or two.
Not everyone is convinced. Speaking to Bloomberg, Michelle Lowry, a Drexel University finance professor, said buying into SPACs can be “more like gambling than investing.”
“We saw this during the internet bubble,” Lowry said. “There were a record number of IPOs, huge first-day returns, and everybody’s talking about it. And if everybody’s talking about it in the conversation, you want to give it a shot.”
Perhaps most worrying – and certainly bad news for Shaq – was the Securities and Exchange Commission’s recent investor alert very much aimed at those thinking about giving celebrity-backed SPACs a shot.
"The SEC recently issued an investor alert over the rise of the celebrity-backed SPAC..."
“Celebrity involvement in a SPAC does not mean that the investment in a particular SPAC or SPACs generally is appropriate for all investors,” the statement read. “Celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss. It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment.”
The statement comes not long after US television host and former hedge fund manager Jim Cramer (whose financial insight is widely valued in the US) opined that celebrity-backed SPACs “feel like an inside joke for the super-rich.”
“These newer SPACs increasingly feel like an inside joke for the super-rich and a way for celebrities to monetize their reputations,” Cramer said. “Believe me, you don’t want to invest in someone else’s inside joke, so please, please, please the way to prevent getting hurt [is to] do homework on the people and if there are businesses before you go near these things.”
Joke or no, as with all investments due diligence is always required. After all, putting your money to work just because a rapper, basketball star and former astronaut say so should never be considered a sound investment model.
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