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.
US stock exchanges continue to welcome SPAC listings with little or no regard to disclosures to prospective or actual shareholders, beyond the basic financials. The financials tend to just disclose the price of the IPO shares as well as the targeted amount of the capital sought in the listing.
Even post-IPO, many of the SPACs that I’ve been examining provide scant details on what’s going on if they provide any at all beyond required SEC and IRS reported forms. Some of the most prominent SPACs don’t even have websites for shareholders or even provide investor relations information.
But the market loves them right now.
According to a group called SPAC Insider, 2020 has seen 57 SPAC IPOs, which represent 40% of the overall IPO market. Right now, there are some 120 SPACs listed with an estimated $40 billion in cash to spend according to SPAC Research.
However, I have two better alternatives that I’ve followed and recommended inside Profitable Investing for years, some of which we have had since their IPOs years ago. Today I’ll give you one. Come back on Monday for the other.
Holding Companies & BDCs
Like their SPAC peers, holding companies and business development companies (BDCs) are set up under the Investment Companies Act of 1940, which allows them to invest capital without having to pay corporate income taxes.
But they’re further codified under the Small Business Investment Incentives Act of 1980, which was passed to incentivize companies to finance or invest in small to mid-sized companies when the US banking market was in disarray during times of out-of-control inflation.
But these are different than SPACs. They come to market with specific objectives for lending and equity investment. And they report underlying investments and all of the rest of their financial data just like a traditional financial company.
They’re also upfront with management salaries just like a regular company. And in turn, they lend to or buy and own companies, reaping cashflows and aiding their developments. Now and again, they sell the firms or cash in by taking them public.
And investors get a cut of those BDCs’ profits in the form of big dividends, since 90% of the profits have to be disbursed to investors.
In many ways, these are like smaller versions of Berkshire Hathaway (BRK/A) in operation, although Berkshire is susceptible to corporate income taxes.
Compass Diversified Holdings (NYSE:CODI) is a holding company that buys, develops and sometimes sells companies that are strongly branded industrial or consumer product firms that generate lots of cashflows.
It currently has an impressive collection of these companies with piles of cash and credit. And it’s looking for more. Revenues have been consistently rising, with gains averaging 13.2% on a compounded annual growth rate (CAGR) basis over the trailing five years.
Compass Diversified Total Return Since IPO — Source: Bloomberg Finance, L.P.
It pays shareholders well with a yield of 8.3%. And since its IPO back in 2006, it has returned 311.1% for an average annual return of 10.4%. And I see a lot more gains to come.
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.