The boom in interest in SPACs as a way to take companies public has drawn a huge number of retail investors to pour their money into SPACs in the hope that they will end up owning the next hot company. However, there is a key thing Warren Buffett doesn’t like about SPACs, and that is the requirement that the SPAC has to buy a company within two years or hand its money back to investors. This incentivizes SPACs to make a deal no matter what.
“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,” Warren Buffett wryly noted at the 2021 Berkshire Hathaway Annual Meeting. “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. ”
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© 2021 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.