MINNEAPOLIS (PRWEB) February 11, 2021
In his February 3, 2021, WealthManagement.com article, “SPACs: Not So SPACtacular,” independent broker dealer recruiter and industry thought-leader Jon Henschen observes how Special Purpose Acquisition Companies, or SPACs, “…have been on a hockey stick growth chart since 2016. This alternative method of going public versus the traditional IPO process has been getting the attention of RIAs and broker/dealers such as Cetera’s Adam Antoniades, who has said SPACs may be a viable consideration for that firm going public.”
According to Henschen, “Longstanding IBD executives are also now directly involved with SPACs. That includes Larry Roth, who has held the CEO spot at both Cetera and Advisor Group, now raising capital for Britain-based Kingswood Holdings, whose blank check company Kingswood Acquisition Corp. recently went public with the intention of using raised capital to firms in the fast-growing wealth management space.”
Henschen points to published statistics on SPAC transactions from 2010 – 2020 that demonstrate their dramatic growth and notes that many SPACs use the services of a well-known person for promotion, where the celebrity touts that they are a primary investor in, or sponsor of the SPAC, such as basketball icon Shaquille O’Neal.
In his commentary, Henschen provides a quick overview of the difference between going public via IPO versus a SPAC, explaining, “When a company goes public through the traditional IPO process, regulations like the SECs “Regulation M” mandate a quiet period that restricts the company from going out to the public and taking a sales-hype approach to drum up interest. SPACs, on the other hand, have no such restrictions. They can go to the media and put sales hype into overdrive.
Continuing, Henschen states, “SPACs raise capital for an IPO in order to, in the future, buy a private company with common stock at a common price of $10 per share and a warrant that gives investors preference to buy more common stock at a later date at a fixed price. While SPAC sponsors look for a company of interest, the raised funds are kept in a trust, with a two-year timeline to invest the money. If the money is not invested, the SPAC will be liquidated and the proceeds returned to investors.”
According to Henschen, the primary driver of dramatic SPAC growth is the compensation model of “twenty and two.” Most SPAC sponsors receive 20% of the equity in the post IPO company, a feature known as the “sponsor promote.” They can purchase warrants that allow them to increase that ownership level. They also earn a 2% ongoing fee on the assets, regardless of how much the fund makes or loses. A fund that raised $1 billion of assets would generate $20 million of fees for the sponsor annually.
Henschen then asks the question, “Are SPAC costs worth these high fees due to SPACtacular performance?” and provides statistics revealing that with a total of 93 deals between 2015 – 2020, the average return across 11 sectors -9.6%.
Henschen concludes his argument by pointing to Jesse Felder. Felder, publisher of The Felder Report and co-founder, VP, and head trader of a multi-billion-dollar hedge fund Aletheia Research & Management, says that SPACs have proven to be some of the worst investments you can own. Felder believes they are borderline fraudulent and that it is only at the height of speculation mania that you would see an appetite for SPACs as we see today. When you look at the compensation, it’s no wonder everyone wants to start their own SPAC.
Jon Henschen is founder of Henschen & Associates, an independent broker-dealer recruiting firm located in Marine on St. Croix, Minnesota. With more than 20 years of industry experience, Jon is a staunch advocate for independent financial advisors, and is widely sought after by both reps and broker dealers for his expertise and advice on independent broker dealer topics. He is frequently published and quoted in a variety of industry sources, including WealthManagement.com, ThinkAdvisor, Investment Advisor Magazine, Wealth Management Magazine, Financial Advisor IQ, Financial Advisor Magazine, Investment News and others.