What Should IPO Investors Make of All This SPAC Fanfare?
Investors are likely seeing special purpose acquisition companies (SPACs) discussed frequently in financial news and media, but it's probably less clear how to build them into a portfolio or if it's even wise to be involved with them at all. These investment vehicles have been around for several decades, but there has been a recent explosion in the number of SPACs starting up. They are certainly not appropriate for all investors, but they often bear similarities to IPOs in terms of sector exposure, upside potential, and uniqueness of opportunity. Investors who are thirsty for more options may enjoy some success by considering this alternative.
A flurry of high-profile listings was supported by investor appetite for new names and pent-up demand following a COVID-related delay in listing volume earlier in the year. Low interest rates and support from the Fed have pushed investors into U.S. equities, and certain hard-hit industries such as travel, hospitality, and dining have lagged in demand as capital flows toward less affected sectors. Put off by share prices that are decoupling from fundamentals, IPOs represent new opportunities where investors haven't necessarily been priced out of the upside potential. Meanwhile, private companies are eagerly opting to tap into public markets to capitalize on favorable equity valuations before potential alterations to capital gains tax policy.
Investors are clearly seeking new opportunities, especially in the healthcare and aggressively valued technology sectors, but the overall number of publicly-listed stocks is still low relative to historical levels. A few dozen IPOs are certainly exciting, but they fall short of scratching the itch for fresh stories. A smaller investable universe and mostly efficient markets are motivating investors to look elsewhere. Fortunately, IPO investors now have an alternative that delivers many of the same benefits.
Source Fool.com
