Insights

SPACs—special purpose acquisition companies—have taken Wall Street by storm, posting record-breaking deal figures in 2020 as investors turned to these vehicles to mitigate the increased market volatility risk of traditional IPOs.

Last year, there were 480 IPOs on the US stock market, and SPACs (also known as blank check companies) accounted for more than half of those offerings, according to EisnerAmper. The number of SPAC IPOs in 2020 alone surpassed 2019’s total number of IPO transactions of 233. The surging popularity of these investment vehicles has even inspired a rap video titled “SPAC Dream”.

For capital raisers, this means there is more interest—and possibly more competition—when raising capital for a SPAC offering. But there may be an additional type of investor that’s overlooked when raising funds: retirement investors. IRAs, particularly self-direct IRAs, represent billions in potential capital.

Americans hold approximately $10.8 trillion in IRAs[1]—of which the Securities and Exchange Commission (SEC) and Retirement Industry Trust Association (RITA) estimate 2% to 5% are held in self-directed IRAs. At 3%, that's $324 billion.

Unlike traditional retirement accounts, self-directed IRAs allow investors to use tax-advantaged money to buy alternative assets—including private equity. These IRAs can hold everything from hedge funds to corporate debt to SPACs. In a traditional self-directed IRA, investors can defer capital gains taxes until it’s time to take distributions. In a self-directed Roth, investors can avoid taxes on distributions.

SPACs and IRAs

At Pacific Premier Trust, we custody alternative assets for our clients’ IRAs, and often, our clients invest in private equity deals for diversification and potentially higher returns. SPACs may be an attractive investment opportunity for self-directed IRA owners for a few reasons:

• Access to founder shares: Initial investors in a SPAC receive founder shares, which can appreciate tax-free in a self-directed Roth IRA. If the Roth account has been open for at least five years and the account owner is at least age 59 1/2, any profit gained on selling those shares and taking a distribution is tax-free.
• Faster route to the public market and liquidity: A SPAC has no business operations; its sole purpose is to raise capital through an IPO for an acquisition. This structure allows for a more streamlined path to the public markets than a traditional IPO. Rather than being locked up for five or six years in a traditional private equity fund, SPAC investments may generate liquid returns for a retirement investor in two or three years.
• Money back if no deal is reached: Once a SPAC lists on the public market, it typically has two years to make an acquisition. During that time, the money raised in the IPO is placed in an interest-bearing trust account. If SPAC shareholders do not approve of the proposed merger or the SPAC term expires, the IPO capital is returned to investors.
• Opportunity to opt out: Once SPAC shareholders approve a target company acquisition, the deal moves forward. But if an investor does not believe the acquisition is in their best interest, they can opt out of the deal, and their capital, plus interest, is returned to them.

PIPEs—private investments in public equity—offer another way for retirement investors to participate in a SPAC. Before signing an acquisition agreement, SPACs often arrange equity financing, such as PIPEs, to finance a portion of the purchase price for the deal. In return for providing additional capital to the SPAC, PIPE investors are typically granted a private placement of the SPAC’s shares at its IPO price. Self-directed IRA investors can also hold these private placements in their retirement account.

Like every private equity opportunity, investors must weigh the pros and cons of participating in a SPAC-related offering. SPACs have fewer SEC restrictions and requirements, so due diligence is critical. An investor must also have faith that the SPAC’s management team can execute their vision to complete a successful acquisition. But for retirement savers who have weighed the risks and potential rewards inherent in a private equity investment, SPACs and PIPEs offer a tax-advantaged means of diversifying their retirement portfolio.    

To learn more about investing in SPAC or PIPE offering using self-directed IRA funds, contact our Client Services team at 1.800.962.4238 Monday through Friday, 7 a.m.-5 p.m. MT.