In simpler times, famous people-turned-entrepreneurs bought wineries or invested in car dealerships — or simply built multibillion-dollar lifestyle businesses based on the strength of their family brand.
But in the pandemic economy, there is a new way for the wealthy and recognized to adapt their status and wealth: through a after-sales service. (It’s a “special purpose acquisition company,” but more on that later.)
Sports figures seem particularly enthusiastic about them: Alex Rodriguez, Steph Curry and activist and former NFL quarterback Colin Kaepernick – or should we say: “SPAC-ERNICK– everyone has one. It is the same Billy Beanethe former Oakland A general manager and subject of the book and movie “Moneyball.”
Websites like SPAC track and SPACinsider helping the obsessed keep up to date with the latest. Political types also participate in the SPAC action. (Former Speaker of the House Paul Ryan joined one.) And, of course, there’s a hell of a media “King SPAC” — Chamath Palihapitiya, a former Facebook employee and billionaire investor who posts images of his ripped abs on Twitter and sponsored six SPACs that raised a total of $4.34 billion, according to Bloomberg.
Maybe if there was a little more in-person socializing, you’d hear people chatting about celebrities and SPAC around couches, and you’d be asked for an opinion. How much you might say to yourself, questioner, what a devil after-sales service?
Like “leveraged buyout” and “secured debt obligation,” SPAC is an obscure Wall Street term that has fallen into the mainstream lexicon.
SPACs are shell companies listed on the stock exchange, with the purpose of buying a private company and taking it public. Essentially, a SPAC is a way to do an IPO without all the time, expense, and regulatory oversight traditionally required. The sponsors of a after-sales service typically have two years to identify acquisitions or must return their investors’ money.
Everyday investors can invest money in SPACs – they are traded on various exchanges – and before the SPAC buys a company, its funds are usually invested in government bonds.
Also known as “blank check corporations”, SPACs have have existed in their current form since the 1990s, and for years was considered a scam-prone backwater of the financial world, but it caught fire during the pandemic. And the SPAC mania is only growing: SPACs raised $42.7 billion in the first six weeks of 2021, more than half the amount they raised all of last year, according to the Financial Times.
So why are celebrities jumping on the bandwagon? To get rich, of course.
Barry Ritholtz, President and Chief Investment Officer of Ritholtz Wealth Management and a Wall Street scholar, the piece explained. “I imagine a business leader somewhere says to them, ‘Hey, listen, there’s this hot new financial offering. Let’s put your name and celebrity on it,'” Mr. Ritholtz said. bring pixie dust to a SPAC and the earning potential is tens, if not hundreds of millions of dollars.'”
Celebrities are not so much the financial decision-makers as the promoters brought in to attract investors (“strategic advisers”, in the jargon of the prospectus). Like soda or sneaker marketers, SPAC officials harness the power of celebrity to sell a product — in this case, a financial instrument the New York Times has likened to a “empty shell.”
Hypothetically, let’s say a SPAC sells for $10 a share and raises $500 million in the public markets. If a famous adviser had negotiated 1% of this deal, he is rewarded with a stake in the company worth $5 million. But now, let’s say the same SPAC also finds a merger candidate, brings in other investors, and a $10 billion deal is struck. The celebrity’s 1% stake earned them (on paper) a salary of $100 million.
Basically, celebrities are risking their reputations for, say, a few million dollars upfront, “but if it works out, it’s $100 million,” Ritholtz said. “Humans like asymmetric risk-reward situations.”
He added, “I can’t believe we haven’t seen a Kim Kardashian SPAC yet.”
Much like a stock market boom during a global pandemic, the term SPAC has a silly and nonsensical quality, lending itself to pun: SPAC-tacular! SPAC-tastic! It was a missed branding opportunity that Mr. O’Neal’s investment vehicle was named Forest Road Acquisition Corp and not Shaq SPAC.
The hosts of Bloomberg’s morning show, “Surveillancehave made SPACs a running joke, as each day brings more news, as well as head-scratching over speculative mania. “Who are these people? Why would I trust them with billions of dollars?” co-host Paul Sweeney asked one recent morning. (Many SPAC lose money after finding a business to acquire, especially in the year following a merger.)
CNBC’s “Mad Money” host Jim Cramer is also dubious, saying on a recent program he thinks SPACs have “jumped the shark”. His reasoning? The involvement of so many celebrities with minimal investment experience.
“These new SPACs are looking more and more like a joke for the super-rich and a way for celebrities to monetize their reputations,” Mr. Cramer told his viewers, adding that the whole SPAC celebrity thing seems ” gimmicky”.
For his part, Mr. Ritholtz, ever a student of human nature as it relates to money, cited one of his favorite sayings, The law of the sturgeon. Coined by Theodore Sturgeon, a science fiction writer, it argues that “90% of everything is crap”.
A handful of SPACs have done very well over the past two years, Ritholtz said. That doesn’t mean the Shaq SPAC will too.
“What always happens with investors, regardless of asset class or decade, someone hits the lottery and everyone else piles in,” he said. “SPAC enthusiasm is just an investment behavior. People think of them as lottery tickets, and very often they don’t.