Another (More Profitable) SPAC Alternative

As we covered on Friday: the term “SPAC” stands for Special Purpose Acquisition Company. They are also often referred to as “blank check” companies, as buyers of their initial public offerings (IPOs) as well as buyers in the secondary market are really just supplying cash to the companies behind the stocks to do something yet to be determined or disclosed.

We also talked about how the market loves them right now.

These are not new, and I was involved with these some years ago when I was in investment banking. The structure is pretty straightforward.

Typically, a well-known name works with an underwriting bank to issue a blank check SPAC promising no more than that he and his pals will buy something. Details are limited, as are restrictions.

They tend today to be priced at $10 a share and come with warrants to buy more shares to entice folks to buy at the IPO. The sponsors also get additional warrants at a discount to the IPO price as part of their compensation. So, in reality, buyers start out with less than $10.

Then, the SPAC buys some smaller to mid-sized companies, and something goes well or not. But what’s being pitched now is the idea of the reverse merger, in which a highly-touted company in alternative fuel vehicles or gaming, for example, sells itself in part or whole and the SPAC takes their name.

This goes around the underlying company doing the IPO along with all of the usual scrutiny involved. So, this is what’s feeding the SPAC-tacular frenzy right now. But they’re completely pigs-in-a-poke, unless you happen to be on the inside of the company or the SPAC.

And according to Bloomberg Intelligence, out of a recent new collection of 18 of these reverse mergers, 11 of them are trading below $10 a share. So, they’re far from sure-things.

But it’s the lottery-esque nature of the pitch that keeps pulling folks in right now. And with interest rates under 1%, the idea of parking cash in a new SPAC and seeing what happens has a lower carry cost.

But today I have a second alternative that I’ve followed and recommended inside Profitable Investing for years.

Holding Companies & BDCs

Hercules Capital (NYSE:HTGC) is more of a traditional BDC than Friday’s recommendation, but with a very specific focus on early to mid-stage technology companies. It’s based in the US tech center of Palo Alto, California in the heart of Silicon Valley.

Hercules Capital Total Return Since IPO — Source: Bloomberg Finance, L.P.

It identifies companies in need of capital and financing and provides both, earning interest through their investment and capital gains via equity participation as they go through IPOs, acquisitions or even SPAC deals.

It has hundreds of companies in its current portfolio, and many are recognizable tech names. Its past holdings are some of the more famous in the tech space, including sports gaming companies, which are hot in the SPAC market.

Revenues are up by 28.9% over the past year, and this isn’t an abnormality. The company has been gaining revenue by an average annual rate of 34.3% on a CAGR basis since its IPO.

HTGC’s dividend yields over 11%, and since its IPO in 2005 to date, it has returned over 285% equating to an annual rate of around 9%.

Neil George was once an all-star bond trader, but now he works morning and night to steer readers away from traps — and into safe, top-performing income investments. Neil’s new income program is a cash-generating machine…one that can help you collect $208 every day the market’s open. Neil does not have any holdings in the securities mentioned above.

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