Episode 008. SPACs: Where are the customers’ yachts?

INVESTING (INTERMEDIATE). Recorded December 9, 2022.

For episode 8 of At The Rotterdam we take a deep dive into one of the worst-performing structures of the last bull run. What do you need to know to avoid getting taken to the cleaners by Wall Street?

There is an 80 year old book on the inner workings of Wall Street: Where are the customers’ yachts? It serves to remind us that there is far more money – or at least leverage – in providing financial advice than there is in receiving financial advice. Fees are of course everywhere. But it’s also the motivation. Grifters love financialization, for sure, but the investment business also motivates pretty much everyone to take the most fees and offset maximum risk to those least able to handle it.

Special Purpose Acquisition Companies (SPACs) are just one such example of misaligned interests, uncompensated risk and egregious fees.

Hugely popular in the final throes of the tech boom, SPACs are structured to put retail investors in the eventual combination – the “de-SPAC” – at a huge disadvantage on day 1. Certainly some de-SPACs work out, but this is in spite of the structure, not because of it. 

SPAC apologists point out that IPOs are down as much as SPACs, and blame the investment climate. While this is partially true, the argument ignores the fact that IPOs rallied much more in the run up to the recent correction: While IPOs had 3.5x’d in the three years leading up to the market top, de-SPACs on average hardly budged. Since 2018 SPACs are down 60% while IPOs are up around the same amount.

Some key readings:

https://corpgov.law.harvard.edu/2020/11/19/a-sober-look-at-spacs/

https://corpgov.law.harvard.edu/2021/04/23/recent-spac-shareholder-suits-in-new-york-state-courts-the-beginning-wave-of-spac-litigation/

https://www.warren.senate.gov/imo/media/doc/SPACS.pdf

 

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Rasheed’s Twitter: https://twitter.com/r_sale

 

Disclaimer: Nothing At The Rotterdam should be considered as investment advice. Always speak to a registered financial advisor before investing in anything mentioned on this podcast.