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Buffett calls SPACs ‘a killer,’ says they hurt Berkshire’s ability to do deals

berkshire hathaway (brk-a, brk-b) chief executive warren buffett has strong views on his competition from spacs when it comes to berkshire hathaway’s bargaining power. he “he’s a killer,” he said at the 2021 berkshire hathaway annual shareholder meeting.

A spac, or special purpose acquisition company (also called a blank check company), goes public without a business plan. the spac manager will conduct due diligence on any number of private companies to find a candidate. but if one is not found, the money usually has to be paid back within two years.

according to spac analytics, 311 spacs listed this year raising more than $100 billion, far more than the 248 spacs that raised $83 billion in all of 2020, a record year. Currently, 427 spacs with $138 billion in total cash are looking for deals.

Reading: Warren buffett spac

With all the speculative capital created from stimulating fiscal and monetary policies, there is great competition for a limited group of target companies, which is hurting Berkshire’s efforts to deploy its $145 billion cash pile.

And the competition isn’t just coming from other spaces, it’s also coming from the more traditional private equity asset class, Buffett said. “there’s always been pressure from private equity funds. if you’re managing money for someone else and you get a commission, you get the upside and not the downside, you have to buy something… i had a call from a very famous figure ago She’s been involved in this for many years, and she was wondering about reinsurance. I said I don’t think it’s a very good deal. She said, ‘Yeah, if I don’t spend this money in six months, I have to pay it back to the investors,'” she said. buffett.

In a nutshell, Wall Street is managing its fattening checkbooks to pursue a shrinking list of targets. sooner or later, the incentive structure ensures that bad bets will pile up, buffett said.

“It’s a different equation than you have if you’re working with other people’s money where you get the advantage and you have to pay them back if you don’t do something. And frankly, we’re not competitive with that,” he said. “That’s not will go on forever. but that’s where the money is now and wall street goes where the money is. and does anything… that works. and spacs have been running for a while. [if] you stick a famous name in it, you can sell pretty much anything.”

a warning about spaces

Celebrities, from sports heroes like Shaquille O’Neal to music icons like Jay-Z, have increasingly lent their names to SPACs. O’Neal is a member of the board of directors of the fitness-oriented Forest Road Acquisition Corporation (frx), while Jay-Z sponsors the cannabis-oriented Subversive Acquisition LP (SBVRF).

and, the us The Securities and Exchange Commission (SEC) has taken note. In an investor alert posted on its website in March, the SEC said: “Celebrity participation in a spac does not mean that investing in a particular spac or spacs in general is appropriate for all investors. Celebrities, such as anyone else, they may be enticed to participate in a risky investment or may be better able to bear the risk of loss it is never a good idea to invest in a space just because someone famous sponsors or invests in it or says it is a good investment “.

Buffett quotes the famous economist John Maynard Keynes to emphasize the problems that can arise when there is too much cash chasing too little opportunity, saying:

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In speculative times when everyone has a lot of cash, investing is great until the music stops and that’s when the problems arise. buffett said, “[g]am urges are very strong in people all over the world, and occasionally you get a big push, and the conditions lead to this where more people are buying. They are leaving every day, and that creates your own reality for a while, and no one tells you when the clock is going to strike 12 and everything turns to pumpkins and mice.”

Berkshire Vice President Charlie Munger weighed in first on what motivates fund managers to buy questionable companies. “I call it fee-based buying. In other words, they don’t buy because it’s a good investment, they buy because the advisor charges a fee. And of course, the more you get, the dumber your civilization is getting, and to some extent , it’s also a moral failing because easy money made by things like spacs and total return derivatives and so on, you take it to excess, [and] it causes horrible problems in civilization and doesn’t reflect any credit to the people who are doing it and no credit to the regulators and voters who allow it. I think we have a lot to be ashamed of under current conditions.”

both buffett and munger stress that they are not criticizing the retail crowd for investing in, or “gambling,” in these efforts. “I don’t find it shameful…people who gamble…gambling is a human instinct, and they have money in their pocket, and they know someone else [who] won money [who] I don’t think [is] more smarter than them,” buffett said.

Munger clarified, adding, “I don’t care about the poor fish who bet. I don’t like the pros who take fools.”

jared blikre is a market-focused anchor and reporter for yahoo finance live. follow him @spyjared

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