(This story is for CNBC Pro subscribers only.) For investors wanting to cash in on this year's boom in the so-called blank check companies, Goldman Sachs said look before you leap. It's been a mania in SPACs, or special purpose acquisition companies, as businesses shy away from the traditional initial public offering market roiled by the coronavirus pandemic and wild volatility. So far in 2020, there have been 51 SPAC offerings, raising a record $21.5 billion, up 145% from the same period a year ago, according to Goldman. Last month, Bill Ackman's Pershing Square Tontine Holdings raised $4 billion to become the largest SPAC in history. Other notable SPAC acquisitions this year include Nikola and DraftKings . A SPAC is a blank-check company formed to raise funds to finance a merger or acquisition within a certain time frame, typically two years. The target firm will be taken public through the acquisition. Goldman estimated that completed SPAC offerings currently searching for acquisitions exceeds $38 billion. Goldman analyzed 56 SPACs that completed translations since the beginning of 2018 and found that in the long run, they tend to underperform the broader market and returns are all over the place. During the one-month and three-month periods following the acquisition announcement, the average SPAC outperformed the S & P 500 by 1 percentage point and 11 percentage points, respectively, according to Goldman. However, the boost tends to fade quickly. The average SPAC underperformed during the three, six, and 12-months after the merger completion, Goldman said. The performance distribution is also "extremely wide," with the 75th percentile SPAC outperforming the S & P 500 by 22 percentage points while the 25th percentile transaction lagged by 69 percentage points, the bank noted. Warrants increase returns In a typical SPAC structure, the sponsor raises initial capital by issuing units consisting of comprising a share of common stock and a fraction of a warrant, which allows investors to purchase more stock at a later date. The purpose of the warrant is to provide investors with additional compensation for investing in the SPAC for not knowing ahead of time the specific company that will be acquired. Once the deal is complete, SPAC investors may choose to retain both the shares and warrants, or redeem the shares and hold the warrants, or sell both. "The inclusion of warrants would increase the returns of the most successful deals," David Kostin, Goldman's head of U.S. equity strategy, said in a note. "Ultimately, the upside potential is a function of the sponsor's ability to identify the target, negotiate terms, inject needed external capital, and create long-term value. The redemption option limits downside." Compensation for SPAC sponsors Typically, a SPAC sponsor is compensated with founder shares that equals to 20% of equity and warrants, often referred to as the "promote." However, in a couple recent deals, the sponsors chose to forgo the typical 20% "promote," aligning the financial incentives of the sponsor and shareholders, Goldman noted. Ackman's Pershing Square is one that removed this compensation element as a way to show allegiance to their investors. Pershing is paying $67.8 million for warrants to acquire 6.21% of the SPAC and it won't receive any compensation until the deal closes. "What's new in our structure is it's the first SPAC where we're taking no compensation: no management fees, incentive fees ... we're not buying cheap stock. There's literally no compensation to the sponsors," Ackman said last month on CNBC. — CNBC's Michael Bloom contributed reporting.
