In recent years, Special Purpose Acquisition Companies (SPACs) became a popular investment vehicle, offering a way for private companies to go public without the traditional initial public offering (IPO). This trend attracted retail investors eager to own shares in the next hot company. However, as the initial excitement waned, many investors found themselves holding stocks that significantly declined in value.
Warren Buffett, renowned for his investment wisdom, has been skeptical of SPACs from the start. One critical issue he highlighted is the inherent pressure for SPACs to acquire a company within two years or return the funds to investors. This deadline can drive SPAC managers to make hasty deals, regardless of their long-term benefits for investors.
“If you put a gun to my head and said, ‘You’ve got to buy a big business in two years,’ you know, I’d buy one. But it wouldn’t be much of one,” Buffett remarked at the 2021 Berkshire Hathaway Annual Meeting.
Buffett recalled an interaction with a well-known figure who needed to invest the money quickly to avoid returning it to investors. “I had a call from a very famous figure many years ago who was involved in it and wanted to learn about reinsurance. And I said, ‘Well, I don’t really think it’s a very good business.’ And he said, ‘Yeah, but,’ he says, ‘if I don’t spend this money in six months, I’ve got to give it back to the investors.’ So, you know, it’s a different equation that you have if you’re working with other people’s money, where you get the upside and you have to give it back to them if you don’t do something. ”
Hear Buffett’s full explanation
See the complete Lessons From Warren Buffett series
© 2024 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.