Are SPACs Suitable For Conservative Investors?
Special Purpose Acquisition Companies (SPACs) have experienced a significant increase in popularity in recent years because more and more companies want to go public without undergoing the conventional Initial Public Offering (IPO) process.
However, with a growing number of private companies debuting on stock exchanges, investors are facing the dilemma of choosing the right company to invest in.
Since SPACs can be a risky investment, they are generally not considered suitable for conservative investors.
However, with the rising number of SPACs, even conservative investors can invest in them by developing a healthy appetite for risk. Therefore, let’s explore various aspects of SPACs to determine whether they are a good investment.
Evolution of SPACs
SPACs have undergone significant changes over the years. They were first introduced in the 1990s as an appealing option for sponsors. However, their popularity waned due to poor performance.
Nevertheless, SPACs have made a remarkable comeback. Nowadays, SPACs involve higher-quality companies with better management teams and more investors. This has created a reliable investment cycle and facilitated many companies going public.
Benefits of SPACs
SPACs offer several benefits to both businesses and investors. They provide an alternative way for companies to go public instead of pursuing an IPO.
Many companies have successfully gone public through SPACs within a few months, whereas the IPO process can take anywhere from six months to over a year.
Additionally, when selling to a SPAC, the owners of the target company have greater negotiating power due to the limited time available to finalize the deal.
Another significant benefit of merging with or being acquired by a SPAC is gaining access to experienced management, which helps establish a stronger position in the industry.
Risks of SPACs
Despite the numerous benefits, there are also significant risks associated with SPACs. Experts, such as audit firms in Malaysia, are capable of analyzing specific risks unique to each company. Businesses and investors should be mindful of the following risks:
1. Returns
The returns from SPACs may not meet the expectations of investors and business owners. The popularity of SPACs does not guarantee massive success for every company.
In fact, certain experts have warned that a significant downtrend could burst the SPAC bubble and impact the entire market. Such risks are generally too high for conservative investors, leading them to avoid investing in SPACs.
2. Lack of Deals
There is always a risk of an acquisition or merger deal falling through in a SPAC. In 2022 alone, more than 55 SPAC deals were canceled, and they were meant to be deals worth billions of dollars. Multiple reasons and factors can result in the failure of a SPAC deal, such as:
- Lack of a suitable acquisition target in time due to management’s failure to identify a suitable private company.
- Challenges in negotiating favorable terms for the merger or acquisition.
- Lack of capital to complete the process of going public, typically due to a lack of interest from investors.
- SPAC shareholders raising objections and rejecting a SPAC deal.
3. Scams
As discussed before, the process of making a company public via SPACs has enjoyed massive popularity in recent years. However, this process does not come without its own risks and scams.
Investors and companies must pay close attention to public companies and ensure they are genuine investable entities.
Authorities around the world have established guidelines for investors to ensure they make smart investments rather than blindly following the trend of investing in SPACs.
Conclusion - Investing In A SPAC
Investing in a SPAC becomes easier when relying on experts like audit firms in Malaysia. It is a great way for public investors to partner with investment professionals and venture capital firms.
The exact process of investing in a SPAC can vary from region to region, but it typically involves exchange-traded funds (ETFs). However, like any other investment, SPACs also carry significant risks, as discussed above. Thorough planning is required to mitigate these risks.
Therefore, it is important for both conservative and experienced investors to thoroughly research a company and make an informed decision before investing, after conducting due diligence
