Celebrities are now getting in on the SPAC game — for better or worse

Special Acquisition Companies have just got the Hollywood treatment. But does a star's endorsement equate to a good investment?

Celebrity-backed SPACs are everywhere at the moment. 

Not exactly sure what a SPAC is (celebrity-backed or otherwise)? Then let’s start at the start; a special purpose acquisition company (SPAC), also known as a ‘blank-cheque company’ is an investment vehicle that operates like a corporate shell in order to take a company public. 

Why? Well, SPACs allow company owners to swerve IPO regulations which can make it easier to generate a lot of cash quickly. The owners of the SPAC will then use this cash to invest in another company. 

There’s a catch, though. Most of the time, investors in SPACs won’t know what they’re investing in – likely because the owners of the SPAC haven’t decided what to do with the money yet. 

As we put it in an article last year: 

Essentially, the owners of the SPAC say: ‘give us your money (lots, please) and we’ll decide what to do with it later.’”

And it’s proving incredibly popular. In total, SPACs brought in $83 billion from investors last year (according to Bloomberg) while more than 40% of 2020’s IPOs were done in this way. The model is growing exponentially too; in 2021, SPACs have raised over $70 billion and counting. 

With celebrities like Jay-Z, Ciara Wilson and Shaquille O’Neal (alongside Wall Street billionaires and athletes) publicly backing SPACs, the questions is how much weight should you give to, say, Jay-Z’s reputation as a successful businessman in deciding where to place your money?

Jay-Z's helped to ink the largest ever cannabis SPAC deal

As an article on pymnts.com explains “People who put money into SPACs often have no idea what they are even investing in, gambling on the founder’s overall reputation and popularity.”

As we reported recently, Jay-Z certainly has the business nous to build a combined fortune of over $1 billion with his wife, Beyonce Knowles-Carter. But does that mean you should invest in a SPAC with his name on it? And, celebrity-endorsed or not, are SPACs simply another investment bubble waiting to burst? 

Despite their recent headlines, SPACs are nothing new. In fact, they’ve been floating around in the technology, healthcare, logistics, and telecommunications sectors since the 1990s when the template was developed by GKN Securities founders David Nussbaum, Roger Gladstone and Robert Gladstone.

The beauty of SPACs is that in this new model, Nussbaum, and the two Gladstone’s created a way for companies to go public that otherwise might not be able to, and for sectors where financing might otherwise be scarce to generate funds. 

And there’s cash to be made, too.

Notably, American hedge fund manager Bill Ackman backed a trio of SPACs in 2015 (to the tune of $350 million), one of which eventually took Burger King public. As part of a deal that also saw Burger King acquire US fast food company Tim Horton’s, Ackman was reported to have profited to the tune of roughly $1 billion

More recently, Omnichannel Acquisition (OCA), raised $200 million earlier this year to focus on technology companies, while SPAC Ajax is focused on software and internet companies, and currently holds $750 million.

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