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Why PSPCs, or “Blank Check” Firms, Are Suddenly the Hottest IPOs on Wall Street

“Until about a month ago, there was a free lunch just sitting there,” says Jay Ritter, a finance professor at the University of Florida who studies space. “But now the market has taken over. “

How to buy PSPC

Indeed, as more investors crowded into the sector, initial prices were well above $ 10 per unit, resulting in potential losses. Average day one returns in the first three weeks of January were 6.5%, according to Ritter, much higher than they have been historically.

Judging by the numbers, the process certainly has its fans. In 2009, for example, there was a grand total of an IPO by PSPC. Last year that number rose to 248. In the first few weeks of this year, there have already been 67, for an average IPO of $ 286.4 million, according to SPACInsider.com.

SAVS risks

Longer term, however, average PSPC returns are not to be expected. When Renaissance Capital looked at 93 SPACs that had finally been made public from the start of 2015 to the fall of last year, it saw an average loss of 9.6%. This compares to an average secondary market return of 47% for traditional IPOs.

It often depends on the personalities involved: Since PSPCs are just shells to begin with, you’re basically betting on the major sponsors and their track records.

“My first thought is to watch the players,” says Leon LaBrecque, financial planner at Sequoia Financial in Troy, Michigan. “Who owns this contract?” What else did they do? My advice is to seek out sponsors who have a great reputation and who have a lot to gain from the work of PSPC. Think of Masayoshi Son, Bill Ackman or Chamath Palihapitiya.

However, it takes a little faith to bet on so-called “back-door” IPOs whose disclosures are not as strict as the traditional process. This is why some financial advisers are not fans.

“Why on earth would this type of blind pool be such an attractive opportunity for the investor? Asks David Mendels, a financial planner in New York City. “As they say in poker, ‘If you don’t know who the sucker at the table is, it’s you.’

ETF SPAC

Instead of trying to sift through individual PSPC opportunities, retail investors might be better served by the growing number of PSPC ETFs in the market, which spread risk more broadly. There are now three: SPXZ from Morgan Creek Capital Management and Exos Financial, SPCX from Tuttle Tactical Management and SPAK from Defiance ETF.

The latter is the oldest – only launched last fall – and total returns so far have been 18.6% as of January 26, outperforming both the Dow Jones and the S&P 500 over the course of of this period.

Certainly, the idea of ​​entering private companies before the general public is attractive. But “this trend is going to take a while to show itself,” warns PitchBook’s Stanfill. “A lot of people are watching to see if this is a sustainable investment strategy or if poor performance will make people think twice.”

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