How to Invest in SPACs for Passive Income
Imagine a financial vehicle that lets you invest in the “next big thing” before it even goes public. That’s the allure of Special Purpose Acquisition Companies (SPACs), which blew up in 2020. But can these “blank-check companies” really generate passive income—the kind of hands-off cash flow that lets you earn while you sleep? Let’s get into the world of SPACs, break down their potential and see if they belong in your passive income portfolio.
What Are SPACs?
A SPAC is a shell company created to raise capital through an IPO, with the sole purpose of acquiring or merging with a private company (a process called a deSPAC). Think of it as a shortcut to taking a company public without the regulatory headaches of a traditional IPO.
How It Works:
1. Formation: Sponsors create a SPAC and raise funds via IPO (typically $10/share).
2. Target Search: The SPAC has 18–24 months to find a private company to merge with.
3. Merger: Shareholders vote on the deal. If approved, the target company goes public.
4. Post-Merger: The merged entity trades under a new ticker symbol.
SPACs got famous for bringing companies like Virgin Galactic and DraftKings to market. But as a 2024 study shows, their post-merger performance has been terrible for retail investors, with many deSPACs underperforming the market.
SPACs vs. Traditional Passive Income Strategies
Passive income typically involves assets like dividend stocks, rental properties or peer-to-peer lending—all of which generate regular cash flow with minimal effort. SPACs are growth investments. They’re bets on future appreciation, not steady income streams.
To clarify the differences, let’s break it down:
Factor | SPACs | Dividend Stocks | Rental Properties | |
Income Type | Capital gains (if merger succeeds) | Quarterly dividends | Monthly rental income | |
Effort Required | High (research, timing, monitoring) | Low (buy and hold) | Moderate (management/maintenance) | |
Risk Profile | Very high | Moderate | Moderate to high | |
Liquidity | High (publicly traded) | High | Low | |
Regulatory Complexity | High (merger scrutiny) | Low | Moderate |
Can SPACs Actually Deliver Passive Income?
The short answer? Not really. SPACs are inherently speculative, and their structure favors sponsors and early investors over retail shareholders. Here’s why:
Sponsor Incentives: SPAC sponsors receive 20% of the merged company’s equity (called the "promote") for a nominal investment. This dilutes retail investors’ shares upfront.
Post-Merger Volatility: Most deSPACs underperform. A 2024 analysis found that 65% of SPAC mergers since 2020 traded below their $10 IPO price two years later .
No Dividends: Unlike REITs or dividend aristocrats, SPACs rarely pay dividends. Returns depend solely on price appreciation.
But wait—could SPAC warrants be a loophole?
SPACs often issue warrants (options to buy shares at a fixed price post-merger). While these can amplify gains, they’re high-risk and require active management—hardly "passive”.
How to Approach SPACs for Growth (Not Income)
If you’re still intrigued, here’s a strategic framework to minimize risks:
1. Focus on Pre-Merger SPACs
Look for SPACs with:
Experienced Sponsors: Teams with a track record in your sector of interest (e.g., tech, green energy).
Strong PIPE Investors: Private Investment in Public Equity (PIPE) funding signals institutional confidence.
Clear Targets: Avoid vague mandates like "disruptive tech." Prioritize SPACs eyeing profitable, undervalued companies.
2. Use SPACs as a Satellite Investment
Allocate only 5–10% of your portfolio to SPACs. Pair them with true passive income generators like:
Dividend Growth Stocks: Companies like ASML or Zoetis, which have raised payouts for decades.
REITs: Equity Residential (EQR) generates steady income from rentals.
3. Exit Early
SPACs often spike pre-merger on hype. Sell before the merger to lock in gains and avoid post-merger volatility.
The Risks You Can’t Ignore
Redemption Waves: Investors can redeem shares for $10 + interest before a merger, causing cash shortages.
Regulatory Scrutiny: The SEC is cracking down on SPAC accounting practices and disclosures.
Overvaluation: Many SPAC targets are priced at 10–20x revenue, despite unproven business models.
SPACs Are a Side Hustle, Not a Salary
SPACs might be fun, but they’re not the secret to passive income. For real cash flow, stick to dividends, rental properties or peer-to-peer lending. If you do SPACs, treat them like a novice venture—not a substitute for your main portfolio.
As Marguerita Cheng, a top advisor, says: “Passive income requires upfront work and realistic expectations”. Do your homework, diversify wisely and remember true wealth is built slow.
