Of course with that potential for an outsized reward comes with an outsized risk. A SPAC, at least initially, is a blind investment. Initial investors don’t know how their investment will be used. And as we mentioned above, it can take up to two years for a sponsor to find a partner and bring it public. During that time, investors can’t sell their shares. That’s a long time for an investor to wait for a return on their capital.
And one of the largest risks is that SPACs have a spotty track record at best. In July 2020 the investment bank Goldman Sachs (NYSE:GS) analyzed the performance on 56 SPACs that merged with their targets no later than January 2018. The SPACs that Goldman analyzed were across a cross section of sectors. Sachs concluded that during the one-month and three-month periods following the acquisition announcement, the SPACs on average outperformed the S&P 500 and Russell 2000. However, that performance was not repeated in the 3-, 6-, and 12-month periods after the merger was complete.