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To Invest or Not to Invest in SPACs

Are these structures an attractive opportunity or too risky for individual investors?

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DraftKings (DKNG), Virgin Galactic (SPCE), and Nikola (NKLA) are a few of the special purpose acquisition companies that have generated multibagger returns for their shareholders over the past year. Yet, for every SPAC that generates outsize returns, there are those (such as MultiPlan (MPLN)) that have led to losses for their investors.

Is now the time to invest in SPACs, or should you steer clear? Like almost everything else in this world, it all depends on several factors; in this case, timing, valuation of the merger target, and potential equity dilution. In a previous article, we offered a primer on SPACs, and here we break down the risks and rewards that investors face at each phase of a SPAC’s lifecycle.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.