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A new era

The days of decades-high interest rates are over, as the Federal Reserve is ushering in a new era for financial markets — and, in turn, shaking up some of the advice money managers are offering their clients.

During one of its regularly scheduled meetings in September, the central bank’s Federal Open Market Committee lowered the federal funds rate — the interest rate banks charge each other to borrow money — by half a percentage point. That marked the first time policymakers cut interest rates after embarking on an aggressive strategy to raise the federal funds rate from near zero to as high as 5.5% between 2022 and 2023 in an effort to combat inflation that swelled to levels last seen in the early 1980s.

The U.S. economy is “very strong,” says Dalal Salomon with Salomon & Ludwin. “I don’t believe a recession is really in the cards at this point.” Photo courtesy Salomon & Ludwin

And in early November, the Fed cut its key interest rate again, that time by a quarter-point. Meanwhile, the consumer price index, a key measure of inflation, was 2.6%. That was down from 3.1% for the same period in 2023, a year when the CPI started out at 6.4%. 

Of more significance than the rate cuts was the message they telegraphed to investors: With inflation sufficiently contained, Federal Reserve policymakers will refocus their efforts on achieving maximum employment. The Fed’s goal going forward is to gradually “normalize” interest rates so they’re not so restrictive to economic activity, explains Aashish Matani, a managing director and wealth management advisor with The AHM Wealth Management Group in Norfolk, a division of Merrill Private Wealth Management.

“The rate cuts are precautionary rather than reactionary,” Matani says. “The current economic environment is a point of strength; we’re not running from a recession, and inflation has come down.” 

Understanding that context is important particularly because many people may associate periods of falling interest rates with economic turmoil. The last time policymakers slashed interest rates was during the early days of the COVID-19 pandemic when they took swift action to stabilize the economy.

The Fed’s motivation this time around is different, particularly because the U.S. economy is “very strong,” says Dalal Salomon, founding partner and chief financial officer at Salomon & Ludwin in Richmond. “I don’t believe a recession is really in the cards at this point,” she says. 

While unforeseen shocks to the economy could always cause the Fed to change course, policymakers are currently charting a course of steady rate cuts. The federal funds rate is projected to fall to about 3.4% by the end of 2025 and to 2.9% by the end of 2026, according to the median of year-end forecasts from central bankers.

Given the likelihood that interest rates are headed lower, what should you do with your money now? Matani, Salomon, and other Virginia-based financial advisers say it’s a prime time to reassess investment strategies and holdings.

Control what you can control

This new era of falling interest rates isn’t a reason to overhaul your saving and investing strategies, but it may serve as a good excuse to do a financial checkup. 

“We have no control over how much the Fed will likely cut rates,” says Susan Kim, a private wealth adviser and managing partner of Kim, Hopkins & Associates, a financial advisory practice of Ameriprise Financial Services based in Vienna. “That’s why I tell my clients [to] focus on what you do have control over.”

Just as you prioritize family relationships and physical and mental health, it’s similarly important to think about your financial well-being, Kim says. Things you can easily control include your daily, weekly, and monthly expenses, along with the amount of money you save each pay period. She pushes clients to achieve a personal savings rate of 15% to 20%.

Another way to save money? By looking for opportunities to refinance debt. While central bankers directly control the fed funds rate, other interest rates tend to move directionally in sync — and you may stand to benefit.

Rates for 15- and 30-year mortgages have fallen “significantly” since peaking last year and are likely to come down further as the Fed continues cutting rates, Matani says. That means you should actively monitor how much you’re currently paying on your mortgage or other fixed-rate loans and be ready to refinance at lower rates, he adds: “Make sure you’re taking advantage of areas that you can.”

As the Fed ratcheted up interest rates, savers were benefiting by taking advantage of a variety of low-risk ways to earn 5% (or higher) returns on cash. These once-attractive options have already lost some of their luster.

If you were padding a high-yield savings or money market account with extra cash to earn easy returns, you may want to reconsider that decision now — while, of course, keeping in mind your specific financial goals and cash flow needs. “People are going to have to find a place to put that money, and the obvious place would be equities for long-term investments,” says Ryan Torguson, a wealth adviser, portfolio manager and partner with VWG Wealth Management in Vienna, a division of Hightower Associates. 

Equities, including stocks, historically earn higher returns, albeit with more risk than fixed-income investments like bonds. People pouring money into the stock market could serve as a catalyst, while lower interest rates will reduce borrowing costs for Wall Street companies, which could further boost profits and returns, Torguson notes.

Because a lower interest rate environment will be a major theme for financial markets ahead, investors should consider tweaking their strategies. “This could be a good time to look at your portfolio and reevaluate your tolerance for risk,” Salomon advises.

Before the end of the year, investors also may want to consider selling assets that have outperformed the market, either to invest in areas of the market that have underperformed or to have extra cash on hand, Salomon notes. The stock market has notched one record high after another this year, and an eventual selloff is inevitable, though she urges investors to avoid trying to predict when that could happen and instead react once it has. “If markets are falling, we know that’s a great buying opportunity.”

In fact, the rate-cutting cycle, along with a new president, could result in more market volatility, Matani notes. But that’s no reason to stay on the sidelines. “Long-term investors don’t want to be out of this market,” he says.

Staying invested is also important for retirees or people preparing for retirement. A backdrop of lower interest rates once again makes one area of the stock market more attractive: companies that pay steady or growing dividends. “People who need to have predictable, growing income should invest in dividend-yielding stocks,” Kim says.

Building and maintaining a well-diversified portfolio is a good practice no matter what’s happening in the broader economy, but it’s especially important when a broader market shake-up is underway. 

Matani and his colleagues have been recommending that clients increase their allocations to high-quality stocks that provide reliable cash flow and better growth potential amid lower interest rates and potentially slower economic growth ahead. Likewise, he says, it’s important to include “defensive” investments in your portfolio, such as shares of companies in the utilities, consumer staples and financial services sectors that could provide more resilience and help to cushion portfolios against uncertainty.

Even though there are no indications a recession is imminent, some investors who prefer a tactical approach to managing their portfolios may want to monitor consumer spending to watch for any signs of a slowdown. A more cautious investment strategy may be warranted, particularly as behaviors evolve, because consumer spending accounts for nearly 70% of U.S. economic growth, Matani says: “The resilience of consumers is going to be important.”

Diversify beyond stocks

In addition to reevaluating your stock holdings, now is a good time to assess your broader portfolio diversification. Many investors have become less enamored with a traditional 60/40 portfolio — 60% invested in stocks and 40% in bonds — in favor of investing in a wider array of assets that includes cryptocurrencies and commodities.

There are opportunities to capitalize on lower interest rates beyond the stock market, including investments in commodities, Salomon notes. And lower mortgage rates don’t just benefit homeowners but will also make real estate investments more attractive once again, she adds.

Likewise, Matani has been recommending that clients adjust their portfolios in anticipation of lower interest rates, including allocating to sectors like real assets, including real estate, commodities and precious metals. “We’ve been telling clients: Make sure you’re diversified.”

But just because interest rates are coming down, that doesn’t mean you need to pile into financial markets in a more aggressive way than in the past. Advisers recommend that clients should have an emergency savings fund with three to six months’ worth of living expenses that’s readily available, and your financial situation may warrant having extra cash on hand right now.

For the past six months, Torguson and his colleagues have been advising clients to prepare for falling rates by opting for safe assets with longer duration maturities. That advice still stands — though the sooner you act, the higher rates you’ll secure.

For cash you don’t need in the immediate future, you may want to lock up money for several months — or, potentially, several years. The shortest-duration U.S. Treasury bonds or certificates of deposit (CDs), those that mature as soon as one month out, may offer the highest yields, but investors are better off opting for slightly lower rates in exchange for a longer-term guarantee. 

“People who got into long-term bonds over the summer, with interest rates falling now, are going to appreciate that decision,” Salomon says.

Finally, don’t get so swept up by what the Fed is doing that you neglect some long-standing end-of-year money advice. The clock is ticking on several tasks that must be completed by year-end.

Now is a good opportunity to look at your charitable giving for the year and make any additional contributions, Torguson says. It’s also a popular time of year for tax-loss harvesting or selling any assets that are unprofitable to offset or reduce your capital gains tax burdens. “We’re talking to clients quite a bit about that and how to take advantage of any volatility that comes around the end of the year.”

On the flip side, Salomon says, selling profitable long-term investments may be a good idea if you believe capital gains tax rates are headed higher in the future. What’s more, some provisions of 2017’s Tax Cuts and Jobs Act are set to expire in 2025, so she’s been working with some clients who are doing “pretty significant” estate planning ahead of that. 

If it feels like there’s a lot going on, that’s because there is. As Matani notes, the end of year, coupled with the Fed cutting rates, the presidential election and sunsetting tax provisions is making for a “dynamic environment” in the four pillars of wealth management: financial strategy, investment strategy, tax minimization, and legacy planning. “This is a really important time,” he says, “to sit down and talk with your adviser.”

Reality bites

Gen Xers are next in line for retirement, and most are far from being prepared financially for their golden years. They face a substantial shortfall of funds needed for retirement and the largest savings gap of any generation.

“As the first generation to head into retirement largely without the safety net of a defined benefit pension plan, the stakes are higher for Generation X and the margin for error is lower,” according to global asset management company Schroders’ 2023
U.S. Retirement Survey.

Born between 1965 and 1980 (ages 44 to 59), Gen Xers represent 64 million Americans and make up nearly 20% of the population. Their financial fears and challenges are greater in general than the generations immediately preceding (baby boomers) and following (millennials) them, according to the report.

“You are speaking my language,” says Jeff Kelley, principal of Kelley and Co., a Richmond-based public relations and communications firm. Born in 1981, he’s technically a millennial, just outside the Gen X definition, but considers himself on the cusp of both generations.

“I love my job, but I don’t want to be 70 and still having to work,” Kelley says. “My wife and I think we are on track, but there’s a lot to consider. There’s no way to save for everything. We have three kids, ages 10, 8 and 5, and we are putting away whatever
we can for college.”

Gen Xers estimate they will need $1.1 million-plus for a comfortable retirement, but most expect to have about $660,000, a gap of more than $440,000, according to the Schroders report.

More than 60% of Gen Xers are not confident in their abilities to achieve a comfortable retirement. More than 8 in 10 are concerned about the prospect of not receiving regular paychecks.

An average 45% haven’t done any retirement planning. And 66% worry that their workplace retirement plan won’t grow as much as they will need. “The result: The Gen X dream retirement may be slipping away,” the report says.

Social Security? Nevermind

“My focus has been on growing the family business,” says Matt Dozier, 47, vice president of Dozier Tank & Welding, a tank and trailer repair shop with offices in Chesapeake, Richmond and Selma, North Carolina.

Dozier says he never gave any thought about retirement until he reached his 40s, but even now saving money for later in life is not a high priority. He doesn’t have children, so that’s not a factor. He might want to slow down eventually, he says, but as a blue-collar worker, the prospect of not working is not part of his DNA. “I don’t know how not to work.”

His late grandfather, who started the business in 1966, and his father, now president, never took vacations. Dozier broke that tradition. He enjoys sports car racing and recently spent a week camping in his RV next to a racetrack in Florida.

He and his peers are not as worried about retirement as perhaps they should be, he says. “If we have money, we might as well enjoy it now. We see plenty of people who die five years after they retire.”

Dozier admits he has better financial prospects than many of his friends, since he could become an owner in the family business. But he has no guarantees, nor is he relying on Social Security benefits to supplement his income. “It would be great if Social Security is there, but we’ve been told for 20 years that we won’t see it.”

A more likely scenario for him, he says, would be to pool funds with a few buddies and buy property where they would build tiny houses to live in, sharing a large garage.

“Yeah, I might need $1.1 million, but it’s not going to happen,” Dozier says bluntly.

He’s not alone in his thinking. The Schroders survey shows that 47% of Gen Xers believe Social Security will run out of money by the time they reach the full retirement age of 67, compared with 38% of not-yet-retired baby boomers. Only 10% of those who do believe in Social Security’s viability plan to wait until age 70 to receive the maximum benefit payment.

An average 32% of Gen Xers’ retirement plan assets are in cash; 63% fear losing their money, according to the Schroders report, and 24% are not sure how to invest their savings.

Dozier can relate. His maternal grandfather invested poorly, he says, and lost everything before he retired in the late 1980s or early 1990s.

Reckoning

Typically, people don’t get serious about saving for retirement until they get into their 40s or early 50s, experts say. That means Gen Xers still can close the retirement wealth gap, but it won’t be easy.

“Fortunately, even the oldest Gen Xers have some time before reaching their full retirement age,” says Deb Boyden, an author of the Schroders study and head of the company’s U.S. defined contribution division. “Using this time to develop a retirement plan, increase their savings rate and invest more appropriately is crucial to improving their retirement readiness before it’s too late.”

Schroders’ findings are supported by a fall 2023 Bank of America Workplace Benefits Report, which stated that only 17% of Gen Xers feel confident that they’re financially ready for retirement.

“On a more positive note, looking within the 401(k) plans that Bank of America administers for its corporate clients nationwide, 16% of Gen Xers increased their 401(k) contribution rate in the fourth quarter of 2023, compared to just 3% who decreased their contribution rate,” says Matt Card, a Northern Virginia-based media relations executive for Bank of America.

Generation X is the first modern generation to experience the full effect of a societal shift in retirement planning from defined company pension plans to defined contribution plans such as 401(k)s, transferring financial responsibility from employers to individuals.

Defined contribution plans offer tax benefits. Employees choose how much to contribute, subject to annual limits, and some employers match their contributions.

“Corporate-defined pension plans started to decline in the 1980s with the advent of 401(k) plans and are now rare and have been for the past 15 to 20 years,” says Michael Joyce, president of Agili, a financial planning firm in Richmond.

Most government employees still have pension plans, Joyce notes, some with cost-of-living increases but most without. However, only 14% of working Gen Xers have defined benefit pension plans, according to a 2023 report from the National Institute on Retirement Security.

The way that Gen Xers, the original latchkey kids, deal with self-reliance for retirement planning will set the precedent for generations to follow, experts say.

“Clients in the [Gen X] age group are approaching their peak earnings years,” Joyce says. “It is very important to save at least 10% of their earnings and take advantage of company retirement plans — 401(k), 403(b), 457 — as well as maximizing other potential corporate perks, including nonqualified deferred compensations plans [tax-deferred payments made at a future date to allow for certain events], Health Savings Accounts and restricted stock awards.” He recommends they also take advantage of 529 plans for college savings.

Stop making sense

Donte Smith, a Richmond-based vice president and financial adviser with Merrill Wealth Management, calls Gen Xers “the sandwich generation,” taking care of children (either in college or with college on the near horizon) while caring for one or two aging parents. “They have significant demands on both sides,” he says, “and barely have time to take care of themselves.”

This generation also weathered three major market corrections — the 2000 dotcom tech bubble, the 2007-2009 Great Recession, and the COVID-19 pandemic in 2020. “All of that has impacted their investments and their confidence and ability to save at the level they should,” Smith says.

Throw in rising health care costs, soaring inflation over the past couple of years, along with high interest rates and lagging wages — and saving money becomes even more difficult.

Gen Xers with access to matching defined contribution plans should at minimum invest the percentage matched by their employers, Smith advises.

A 5% match is common, he says. For example, an employee makes $100,000 a  year and puts $5,000 annually into a 401(k). A 100% company match would turn that into a $10,000 investment. Those over age 50 should, if possible, also take advantage of any catch-up provisions, allowing them to sock away even more.

Gen Xers, Smith says, tend to fit into three main groups:

One bunch hasn’t thought much about retiring because they’re too busy rearing their families and paying down debt or saving to buy their first homes.

Others have saved some money but haven’t created retirement plans and don’t know where or how much to invest, he says.

The third group theoretically has done the right thing by saving and investing for retirement since early adulthood. They feel in control of their retirements but don’t have customized plans.

Everyone needs a plan to make sure they’re making the right investment decisions, Smith says. Tactics, whether saving or investing for retirement, should never come before the plan. “You start with a plan,” he says, “and everything you do has to line up with the plan.”

Say, for example, you want to save $1 million and retire in 20 years, Smith notes. How much money should you save each week or month, and how should it be divvied among stocks, bonds and saving accounts? How much risk is the investor willing to take?

“In [your] 40s, all of a sudden you see the end of the track and know you have to get serious about retirement planning,” Smith says, adding that most people in this age group have enough time to realize the benefits of compound interest growth in their investments.

Smith suggests Gen Xers modify their spending habits — cutting back on streaming subscription services or dining out — to increase their retirement savings.

My so-called life savings

The typical Generation X household (with half saving more and half less) has only $40,000 in retirement savings, according to the National Institute on Retirement Security report.

More than half of Gen Xers (55%) participate in employer-sponsored retirement savings plans, according to the 2023 NIRS report, which analyzed 2020 data from the federal Survey of Income and Program Participation and found large discrepancies between average and median amounts of retirement savings.

Everyone needs to “start with a plan” for retirement savings, says Donte Smith, a vice president and financial adviser with Merrill Wealth Management. Photo by Matthew R.O. Brown

The average account balance in private retirement accounts (individual retirement accounts, Keogh plans for the self-employed, defined contribution plans) among working Gen Xers was $129,994. However, the median account balance, with half saving more and half less, was only $10,000. Also, 40% had accounts with zero balances.

“Most Gen Xers, regardless of race, gender, marital status or income, are failing to meet retirement savings targets,” according to the NRIS report.

“Shoring up the Social Security trust fund is critical for assuring Generation X of its retirement security,” the report adds, noting that policy actions such as increasing plan access for part-time workers and reforming a saver’s credit (a federal income tax credit) also would help.

Unlike many of his peers, Kelley has mapped out a savings plan. He and his wife, Cristin, rolled over their 401(k) accounts from previous employers into IRAs, preserving their tax-deferred status with no early withdrawal penalties.

They have a Simplified Employee Pension (SEP) IRA, which allows contributions up to 25% of compensation. And they have Virginia 529 college savings plans for their three children.

Their cash savings is invested in a high-yield bank account. Plus, they have a taxable brokerage account or “robo-adviser,” an online platform that automatically manages and allocates investments based on risk tolerance and targeted returns. “This could be retirement someday but is really a place to park accessible funds if ever needed,” Kelley says. “I try not to touch it.”

Social Security doesn’t figure into their strategy at all.

“We try to save as much as we can, but we also want to live our lives,” Kelley says. “My goal is A) Be with my kids as much as possible, and B) Make as much money as possible.”

The family likes to go on a vacation once a year. They go out to eat but only occasionally. They don’t go to Starbucks. Nor does Kelley go out to lunch during workdays.

“Our cars are paid off. Our house is within our means,” Kelley says. “Am I rich? No. Smart with money? Hopefully.”

Wilbanks Smith and Thomas acquired

Norfolk-based Wilbanks Smith and Thomas Asset Management has been acquired by Cleveland-based registered investment adviser Clearstead Advisors.

The companies signed the merger in February 2024. Financial terms of the acquisition, which closed April 1, were not disclosed. Clearstead rebranded WST’s advisory business as Clearstead Advisory Solutions, a division of Clearstead Advisors.

A wealth and investment management firm, Wilbanks Smith and Thomas (WST) had more than $5 billion of assets under management as of Dec. 31, 2023, according to a news release. After the closure of the merger, Clearstead and its subsidiaries have about $44 billion in total assets under advisement, including $20 billion in total assets under management, 225 employees and offices in nine cities.

The six WST partners became shareholders in Clearstead, giving it a total of 65 employee-owners. The division’s 45 employees will continue to serve clients from offices in Norfolk, Roanoke and Raleigh, North Carolina.

Former WST Managing Principal and Chief Investment Officer Wayne Wilbanks co-founded WST in 1990 and will continue to lead the division in Norfolk and the mid-Atlantic states, now as executive managing director of Clearstead Advisory Solutions.

“We are philosophically similar to Clearstead in our client approach and a strong complement geographically, given our presence in the mid-Atlantic and Southern states,” Wilbanks said in a statement. “Most importantly, our clients will benefit from Clearstead’s family office planning capabilities, alternative investments platform, in-house research and wealth management capabilities.”

WST is Clearstead’s largest acquisition so far. Since Chicago-based private equity firm Flexpoint Ford purchased a majority stake in Clearstead in 2022, the Cleveland-based firm has made a string of acquisitions, including Cleveland-based wealth managers Burkhart & Co. and Scott Snow (financial advisers) and Santa Fe, New Mexico-based financial adviser Avalon Trust.

“Strategic and prudent mergers make us a stronger firm — each brings talent and capabilities to serve clients more effectively, which is our primary focus,” Clearstead CEO and Co-Chairman Dave Fulton said in a statement. “This is the impetus for our combination with WST, for which we have the highest hopes.”

The times they are a-changin’

Talk of a looming recession has seemed endless for the past few years. However, with their eyes on long-term retirement investments, many wealth management advisers’ clients have avoided dramatic, emotion-driven decisions.

Educated and guided by advisers, they understand the cyclical nature of investing and therefore are considering varying options on where to put their money.

Meanwhile, keeping up with changing times, some advisers are adjusting their business operations. Others are considering mergers and acquisitions, wanting to expand their resource capabilities. And for the large population of baby boomers aging out of their careers, retirement has become an option for both wealth advisers and their clients. These converging trends all make for an interesting and transitional time for the wealth management industry.

When it comes to those suggesting a recession is on the horizon, Michael Joyce, president of Richmond-based independent fiduciary firm Agili, says he’s been a skeptic for the past two years.

“Inflation is slowly retreating. Supply chain issues have largely been resolved and that is bringing down goods inflation,” Joyce says. “Indeed, many who had predicted an imminent recession have now thrown in the towel and are predicting a ‘soft landing.’”

It’s comforting to know that history shows the average recession is much shorter (14 months) than the average expansion (48 months), setting up greater hope for investing in equities.

But for those maintaining a more cautious approach, Aashish Matani, managing director and private wealth manager with Merrill Private Wealth Management in Norfolk, says many investors have been adding to their bond and alternative investment allocations and that most other asset classes are seeing outflows this year. In particular, more investors are putting cash into U.S. Treasurys, he says.

Matani’s clients also are seeking opportunities to rebalance their portfolios amid current market volatility. In addition to fixed income and equity investments, clients continue to consider alternative investments in areas such as private equity, debt and select real estate sectors.

Nevertheless, wealth management clients and consumers overall have some potential economic headwinds to navigate, Joyce says.

Pent-up goods-and-services demand from the pandemic could begin to wane, he says, adding that higher interest rates are already impacting consumers with variable rate debts such as credit cards. Borrowers with low fixed-rate debts are starting to see some debts mature and are facing higher rates to refinance, Joyce says.

“We do expect to start to see more credit stress,” he says. “While defaults are still not far off all-time lows, we do expect these to start to increase — albeit not to worrisome levels.”

Long-term optimism

Expect to see an “explosion” of mergers and acquisitions in the wealth management industry in coming years, says Simon Hamilton, managing director and portfolio manager for Reston-based The Wise Investor Group of Raymond James. Photo by Will Schermerhorn

Joyce is pleased with available yields in short-term bonds, including very short-term 4-week to 3-month Treasury bills. “There’s very little risk to those investments,” he says. “It is important to remember that most financial goals are long-term. For the most part, we are not investing for a 6- to 12-month time horizon. And it pays to be optimistic over the long term.”

Nevertheless, this year has been a challenging one for conservative investors, says Simon Hamilton, managing director and portfolio manager for Reston-based The Wise Investor Group of Raymond James.

Fixed-income investors “were ‘penalized’ while other asset classes performed better,” Hamilton says. “This year has been all about a handful of stocks doing well. Traditionally, defensive cash flow-oriented investments like bonds and dividend-paying blue-chip stocks have in aggregate been the worst performers. Even gold has significantly underperformed the S&P 500.”

Hamilton says he sees 2024 as a year for “revenge” for these conservative investors who are seeing some recovery in fixed-income investments lately after they underperformed over the past year or so.

“What we’re seeing now with interest rates has historically resulted in strong future returns for the next six or seven years,” Hamilton says. “There is a strong historical correlation between starting yields and future returns going out seven years or so. If rates are 5% to 6% today, then there’s a good chance that’s what bond allocations will perform on an annualized basis.

“If inflation moderates, then real returns adjusted for inflation could be positive for years to come. There’s a decent chance the Fed will cut rates in 2024, which would be helpful to dividend stock investors and bondholders.”

For 2024, he says, “simpler will be better.”

In the recent past, some investors, looking at basically 0% interest rates, experimented with investing in and/or managing rental properties, which is generally outside their skill set, and getting mild returns, according to Hamilton.

“They also in many cases dipped their credit standards, extended duration by
going into long-term investments, and pursued in some cases more sophisticated, less-transparent and less-liquid strategies. Now, you can get 5% on cash,” he says.

Joyce says clients not wanting to rely as much on the stock market and fixed-income investments are showing renewed interest in nontraditional investments such as private credit and private real estate — investments that are illiquid but have the potential for premium returns.

“These investments require a lot of research and specialized knowledge,” Joyce says. “These are not investments that you can look up in The Wall Street Journal or Yahoo Finance. You have to work hard to do your due diligence on their outlook, and make sure your clients understand the potential opportunities and the potential drawbacks of the investment.”

Generational changes

Some older, long-term holders of real estate assets are seeking advantageous ways to sell their properties or transfer them to younger generations.

Dwight Dunton, founder and CEO of Bonaventure, an Alexandria-based integrated alternative asset management firm specializing in multifamily development, investment and property management, says he has seen many property owners look for tax-advantaged ways to exit active ownership in the case of retirement or estate planning. The firm has conducted many such transactions in Virginia in the last two years.

“Experts and economists are all aligned that a large transfer of wealth from baby boomers to Gen X and millennials is underway,” Dunton says. “Of the $84 trillion projected to be passed down to younger generations, the Federal Reserve estimates that $18.9 trillion is tied up in real estate assets. We’ve seen family offices and high net-worth individuals, many here in Virginia, look for unique, tax-advantaged solutions, like the 1031 or UPREIT transaction, to offset the capital gains risks associated with property transfers.”

Similarly, just like their clients, as baby boomer wealth advisers age out of working, the industry is seeing an uptick in mergers and acquisitions, also driven by firms seeking opportunities for greater efficiencies by combining assets with larger groups.

“I’ve been in the industry for 40 years,” Joyce says. “This is an aging industry, and everyone’s thinking about a succession plan.”

The wealth management industry, he says, is a fragmented one in which companies tend to have good cash flow, and “this has attracted a lot of private equity-backed funds looking to consolidate.”

Hamilton expects the number of mergers and acquisitions “to explode” in the coming years. “Right now, the cost of capital is too high, so it won’t happen short-term,” he says. “Wealth management companies will look to sell when it becomes too expensive for them to pay for all the regulations our industry faces.”

Additionally, with fast-changing technologies, including artificial intelligence, to grapple with, firms look to consolidation to scale up infrastructure for departments ranging from IT to regulatory compliance and marketing.

“Investing in technology isn’t cheap,” Hamilton says. “If you can’t be both compliant and a state-of-the-art firm and just can’t make the numbers work, you sell. It’s also very expensive and time-consuming to train young or new advisers. Firms in many cases would rather buy a business than start from scratch.”

One of the most common reasons a registered investment adviser (RIA) firm would agree to a merger or to be acquired, Joyce says, would be if the offer was 1 plus 1 equaling more than 2 — a deal too good to pass up, in other words. However, the most common reasons why an RIA firm would not agree to a merger or to be acquired include the freedom for the firm’s principals/owners to be their own bosses.

“You see many deal structures that are not ‘seller-friendly,’ that put too much risk on the seller,” Joyce says. “There’s also an advantage for an RIA firm to tell prospects that you are an independent firm.”

Also, in a time when many industries are grappling with staffing shortages, he adds, “a lot of acquisitions are done so the buyer can acquire talent.”

“It’s a handshake, face-to-face business,” Hamilton says, “and most young professionals want to work remotely.”

Like a lot of other industries, wealth management offices are also seeking a more diverse workforce.

“Right now, there’s never been a better time to get into our industry if you are a person of color or a woman,” Hamilton says. “Firms are making a strong push to be more diverse — something our industry really needs, given the advancing age and homogeneity of much of the financial adviser workforce.” 

Staying the course

A tanking economy. Rampant inflation. Whiplash in the stock market. What’s an investor to do?

Look for opportunities to rebalance portfolios but, in general, hang tight, wealth management professionals say. Or, as one adviser says, buckle up for a roller coaster ride.

The economy is likely to worsen, experts say, and despite dickering among economists over whether the U.S. entered a recession this summer, investors can expect recession conditions to linger in 2023.

“The greatest threat to investors’ financial health is their own behavior,” says Stephan Q. Cassaday, chairman and CEO of Cassaday & Co. Inc., a McLean-based wealth management firm.

“Market declines do not destroy wealth; how we behave when markets decline is what destroys wealth,” Cassaday says. “Selling when we are uncomfortable and buying when we are comfortable is the opposite of what history shows we should do.”

Jeffrey S. Grinspoon, managing director and partner of VWG Wealth Management in Vienna, advises clients to essentially put their money into two “buckets”: One for funds needed within the next three to five years, the other for investments beyond five years.

It could be another two or three years until the Fed starts a campaign to lower interest rates, cautions Jeffrey Grinspoon of VWG Wealth Management in Vienna. Photo by Will Schermerhorn

Short-term investments include cash, certificates of deposit, Treasurys and short-term bond funds. The long-term horizon includes stock and alternative investments such as real estate, pharmaceutical royalty streams, private equity and/or venture capital.

“The purpose for this approach is to have less volatile and more liquid investments available when you need it, with diminished risk to the principal,” Grinspoon says.

“We don’t pay a lot of attention to the macro environment — geopolitical events, inflation, pandemics,” Grinspoon says, adding that five years is long enough to go through an economic cycle, including the downspin we’re in now.

Also, forget the old advice about putting 60% of investments in equities and 40% in bonds. “That was created many years ago when interest rates were going down,” Grinspoon explains.

The Federal Reserve has aggressively hiked interest rates this year in an effort to tame inflation — now at a 40-year high — and slow consumer spending in an attempt to bring supply in line with demand. In November, the Fed raised interest rates by 75 basis points to a range of 3.75% to 4%, the fourth such hike this year. Economists expect that rates could reach 5% by March 2023.

Grinspoon says the economy likely will worsen, but that doesn’t mean the stock market will crash. He hopes instead for market stagnation until the economy cycles out of its current downturn.

“It could be two or three years before the Fed embarks on an interest-lowering campaign,” he cautions.

Be prepared

Economic uncertainty is always present, Cassaday says, adding that big events that cause market declines are inevitable and can never be predicted. “Investors need to prepare themselves emotionally for scary markets. More money is lost attempting to avoid market declines than has been lost in any market decline.”

He points out that the S&P 500 has seen 10 declines of greater than 20% since 1957. Those who remained invested through those downturns saw average returns of 39% after three years, or 11.33% on an annualized basis.

“Our guidance is to remain fully invested and broadly diversified across asset classes based on investors’ risk tolerance and return requirements,” Cassaday says. “Volatility is often an opportunity to rebalance a portfolio, taking advantage of distortions and mispriced investments. Rebalancing is therapeutic for a portfolio, as it results in buying low and selling high.”

All portfolios should have target allocations tied to historically produced risk and return outcomes, Cassaday says. “With the market being so volatile and suffering an historic decline, certain sectors in the portfolio can be significantly above or below their targets.”

Eileen O’Connor, CEO and co-founder of Hemington Wealth Management in Falls Church, says recessions are as erratic as they are necessary.

“The thing about recessions is that we only for sure know that we were in one and for how long after the fact — hence the current debate about whether we are in [a recession] or not,” O’Connor says.

Traditionally, according to the National Bureau of Economic Research, the U.S. economy enters recession after two consecutive quarters of negative gross domestic product growth, which happened this summer. However, there has also been a strong labor market, low unemployment and corporate earnings growth during the same period, and there’s no historic precedent for that. Therefore, experts have disagreed over whether the economy has truly been in a recession this year.

“That said, recessions are a healthy part of the economic cycle and, because we cannot reliably predict when they will occur or end, we do not tailor our investments to accommodate them,” O’Connor says.

She defines recessions as contractions in the economy that adjust to shocks such as the pandemic. They are healthy because they set the stage for expansionary periods, O’Connor says, noting that the U.S. has been through 13 recessions since 1945.

“I don’t make predictions about how hard or soft this one may be, because it’s impossible to predict and the stock market is not correlated to recessions or expansions,” O’Connor says. “Said another way, stocks can move up in recessions and down in expansions.”

She notes that 68% of economic growth is based on consumer spending, but the stock market is based on a lot more, including corporate earnings, profitability and profit expectations.

“Typically, capital markets recover in advance of a recession ending, so we remain disciplined through all market cycles and control what we can control — our allocation to stocks versus bonds, taxes and fees,” O’Connor says.

While impossible to predict, this recession most likely will continue into the second quarter of 2023, since recessions historically last an average 10 months, she says.

Cassaday says no one has ever consistently predicted the onset, duration or magnitude of an economic event. “This includes stock market declines and advances, interest rate changes, inflation and recessions.” Attempting to make such a prediction “is a waste of time,” Cassaday adds.

By raising interest rates, the Fed is trying to slow the economy to avoid bubbles and reduce inflation. “We believe this is prudent and necessary,’ Cassaday says.

Play the long game

Investors should ignore heated debates about the level of slowing and stick with their long-term plans, wealth managers advise.

“Markets are already reflecting a pretty dismal situation and we believe that a recession is likely already baked into stock prices,” Cassaday says. “Historically, markets bottom and begin to advance before recessions are officially announced. … Although risks exist, our view is that we are closer to a bottom than a top.”

Joseph W. Montgomery, managing director of investments for The Optimal Service Group of Wells Fargo Advisors in Williamsburg, says the U.S. economy’s dip into contraction probably began around midyear and steepened as the year progressed.

“We expect the recession to end in mid-2023,” Montgomery says. “Near-term capital market volatility should continue, while investors grapple with the crosscurrents of [government] policy and economic outlook.”

Most investments are designed to be long term, while making sure any given portfolio has the appropriate amount of liquidity, Montgomery says. “Our single and consistent message has been to play defense in portfolios, which … means making ‘patience’ and ‘quality’ the daily watchwords.”

A dividend-paying stock, for example, could be a reflection of a patient investment, Montgomery says. Quality equates to buying stock in companies whose products have endured and will continue to do so.

For investors, according to the August edition of Investment Strategy Monthly Insights, “defensive sectors like health care, utilities and consumer staples might be the least vulnerable to upcoming rate shocks and economic slowdown.” Meanwhile, the publication pointed out, cyclical sectors such as material and industrials, particularly European industrials, could be more vulnerable to rising energy prices.

“Patience is more than a virtue; it’s a discipline,” Montgomery says. “Patience is revealed over a long period of time if you are adequately diversified. … Achieving wealth over time demands patience. Those who bail out fail.”

That said, it’s important to reassess data to make sure original precepts for making investments are correct, he says. “You can’t just buy it and forget it. … Data is important, but correct data is imperative. You have to be willing to adjust, allocate and diversify.”

Exposure to a broad mix over time provides the best opportunity to control risk, Montgomery says.

However, he points out, those who heavily invested this year in riskier propositions such as bitcoin or internet trading platform Robinhood Markets Inc. saw their investments tumble considerably in value: “Wow, talk about a wild ride!”   

Related article : Navigating metaverse investments

Navigating metaverse investments

Investors itching to get in on the latest tech trend are zooming in on the metaverse — a presumed future virtual or mixed reality iteration of the internet in which users would navigate 3D environments for working, shopping, socializing and entertainment.

By some estimates, the metaverse market could balloon to $5 trillion in annual revenue by 2030.

Beware the hype, though, professional money managers warn. It’s a fledgling technology that is anything but certain. 

“The metaverse — whatever it actually turns out to be — will impact many sectors, so investors are investing in it,” says Eileen O’Connor, CEO and co-founder of Falls Church-based Hemington Wealth Management. But, she says, her firm “would never target [the metaverse] as an allocation separately because, at this point, it’s just a concept.”

No one yet knows who the major metaverse players will be. Sectors likely to benefit include software, gaming, multimedia, social media and cryptocurrencies, experts say.

“Early adoption of a new trend in the investment world can mean great success — or you may lose all of your money,” cautions Rachel Boyell, director of investment strategy and operations for Cassaday & Co. Inc.

“Metaverse ETFs [exchange-traded funds] are extremely new; the oldest of the handful out there just began trading a little over a year ago,” Boyell says. “Investors should proceed with caution on such new products,” she adds, since those funds have not been battle-tested.

ETF rollouts include those from fund companies Fidelity Investments, ProShares and Horizons, enabling investors to gain exposure in the metaverse through an index made up of a basket of stocks.

As of early October, seven metaverse ETFs reported total assets of $438.2 million, according to Morningstar Direct. Top stock holdings are in companies such as Microsoft Corp., Alphabet Inc., Nvidia Corp. and Meta Platforms Inc.

Facebook’s parent company, Meta, changed its name in October 2021, indicating CEO Mark Zuckerberg’s belief in the metaverse as the next technological frontier. But a little over a year later, the company’s stock plummeted 73%, losing more than $700 billion in market value — making it the worst performing stock in the S&P 500 this year. In November, Meta announced it would lay off 11,000 employees, about 13% of its workforce.

Many analysts chalked that up to Meta’s expensive and risky bet on the metaverse and virtual reality. The company spent more than $9.4 billion on metaverse research in 2022, and, as of October, its virtual reality platform, Horizon Worlds, had fewer than 200,000 active users — far below its goal of 500,000 users.

“Trying to predict which stocks will be winners and losers in this amorphous tech universe can be difficult for the average investor,” The Wall Street Journal remarked in an October article about the metaverse.

Driving interest among unafraid investors is the fact that some online gamers are already utilizing virtual reality headsets. Additionally, advancements in artificial intelligence could facilitate and expedite establishment of the metaverse in time.

“Similar to many other disruptive technologies, we are likely decades away from the full implementation of the metaverse at scale,” stated an April tech sector report from Wells Fargo Wealth and Investment Management.

“The reality is the metaverse is yet to evolve,” says Joseph W. Montgomery, managing director of investments for The Optimal Service Group of Wells Fargo Advisors in Williamsburg. “There are not a lot of specifics beyond speculation, and fear of missing out is rarely solid investment logic.”

Metaverse ETFs are tracking high-growth tech-stock ETFs, which makes sense, says Boyell, adding that, “no surprise, they have sold off this year as inflation was a headwind to high-growth valuations.”

Jeffrey S. Grinspoon, managing director and partner of VWG Wealth Management, says metaverse ETFs will have trouble increasing assets. “Putting the technology and probability of success in the future aside … high-growth, long-term horizon investments will continue to struggle in an increasing interest-rate environment.”

Most investors in this economy continue to favor investments that provide cash flow such as dividends, Grinspoon says.

“That doesn’t mean the metaverse won’t continue to gain traction, albeit slower,” he says. “I simply would prefer to look for growth managers who include these types of investments in the overall portfolio, as opposed to a narrow focus like a specific ETF.”  

Related article : Staying the course

757 Angels to join VentureSouth network

757 Angels, a Hampton Roads angel investment group that matches venture capitalists with local entrepreneurs, is partnering with VentureSouth, one of the largest angel network groups in the United States, the group announced Friday.

The partnership, effective June 2023, will provide more access to capital and investors to 757 Angels’ 140 members.

VentureSouth has about 450 members. 757 Angels launched in 2015 and in its first year raised about $4 million from 50 members. Now, it’s grown to 140 and surpassed $100 million in capital invested in 49 companies, according to 757 Angels Executive Director Monique Adams. About 90% of 757 Angels’ member investors hail from Hampton Roads, she said, and all the companies 757 Angels invests in are either Virginia-based or have significant operations in Virginia.

“This is an evolution where our community is really going to get more,” Adams said, adding that 757 Angels will retain its brand and local board and will continue to have a local market director, she stressed. “We’re not upsetting the applecart here. … We’re using this as a vehicle to grow and we can provide enhanced benefits to entrepreneurs and to investors.”

On the entrepreneur side, that means providing broader access to capital and helping early-stage companies to potentially raise money faster. Entrepreneurs will present to VentureSouth’s entire network, which includes 20 chapters across the Southeast. On the investor side, it provides benefits such as diversification and diligence, increased deal flow and access to invest through VentureSouth’s funds. All benefit from a larger professional staff — nine or 10 people instead of two  — and more capacity and capability, Adams said.

VentureSouth, also established in 2015, has invested more than $70 million into nearly 100 early-stage companies. It has chapters in cities such as Charleston, South Carolina; Charlotte, North Carolina; and Atlanta.

Matt Dunbar, managing director of VentureSouth, came to Norfolk to meet with 757 Angels’ members Thursday night.

Matt Dunbar

“From a values alignment standpoint, I think we think about our role in the ecosystem similarly and that we are really focused on trying to bring capital to early-stage companies,” he said. “Entrepreneurs historically have had a fairly hard time raising capital in this part of the world.”

The organizations’ processes and approaches are not identical, but similar, Dunbar says.

“I think this reflects on the great organization we built,” Adams said, adding that “we’ve grown into something that’s exciting and offers incredible benefits to all the stakeholders in the ecosystem.”

Adams, who will assist with the transition, plans to step down from her role as executive director in June 2023. “I am going to take some time to recoup, reset and re-evaluate,” she told Virginia Business. Her replacement has not been identified and a search for a new executive director will begin in 2023.

A former finance executive at predecessor banks of Bank of America and JPMorgan Chase, she sits on the boards of the Virginia Innovation Partnership Authority, Reinvent Hampton Roads and the Hampton Roads Biomedical Research Consortium.

 

 

Booz Allen Hamilton launches $100M VC fund

Booz Allen Hamilton Inc. has formed a $100 million corporate venture capital arm, the McLean-based Fortune 500 global management consultancy announced Wednesday.

Named Booz Allen Ventures LLC, the arm will invest in early-stage companies and technologies across four categories: defense, artificial intelligence/machine learning, cybersecurity and deep technology.

“We are proud and excited to continue our work with the best startups to support our U.S. government clients,” Booz Allen Chief Technology Officer Susan Penfield said in a statement. “The ability to navigate bigger, faster technology waves and identify the right emerging technologies for their mission needs, as well as our own, is vital to enabling growth and mission speed.”

Booz Allen Ventures will help the company expand its tech scouting program, sourcing and recommending tech investments focused on mission-specific applications, according to a news release.

Booz Allen employs approximately 29,500 workers globally, with about 10,000 employed in Virginia. For the 12 months ended March 31, Booz Allen reported revenue of $8.4 billion.

YHB to acquire Md. accounting firm

Winchester-based accounting and consulting firm Yount, Hyde and Barbour (YHB) will acquire Maryland-based firm Glass Jacobson PA on July 1.

Financial details of the transaction were not disclosed in Wednesday’s announcement.

“We are excited to welcome the Glass Jacobson team to the YHB family,” YHB Managing Partner Scott Moulden said in a statement. “We expect their team’s capabilities will enhance our already rapidly expanding reach into the Maryland/D.C. market. YHB and the Glass Jacobson team share the same values of empowering clients and communities with world-class service.”

Established in 1962, Glass Jacobson offers tax, audit and consulting services in the Baltimore and greater Washington, D.C., area. YHB and Glass Jacobson Investment Advisors LLC will form a joint venture to provide wealth management.

“Together, we will be able to provide greater resources to our clients and communities,” Edward J. Jacobson, managing director and firm president of Glass Jacobson, said in a statement. “Our mission to empower the future is steadfast when joining YHB. We will be providing the same excellent solutions that our clients have become accustomed to, with the addition of new and exciting advancements.”

Glass Jacobson’s six principals and 54 other staff members will join YHB, bringing the firm’s total to almost 300 employees. The new employees will continue to work out of Glass Jacobson’s offices in Rockville, Maryland, and Owings Mills, Maryland, which will give YHB 11 offices total.

Established in 1947, YHB offers accounting, auditing, tax, wealth management and risk advisory services. YHB ranked No. 6 on Accounting Today’s 2022 Regional Leaders list for the Top Firms in the Capital Region, with $37.95 million in annual revenue.

SPAC-ulative finance

One of the hottest investment tools in the past year and a half has imploded. But don’t give up on special purpose acquisition companies, or SPACs as these peculiar financial structures are called, industry experts say.

Also called blank-check companies, SPACs are here to stay, but not necessarily at the high-flying levels of 2020 and early 2021.

In Virginia, the practice of going public via SPAC has had mixed results. Most notably, Herndon- and Seattle-based BlackSky Technology Inc. and IronNet Cybersecurity Inc., a McLean-based tech firm that debuted in late summer, have seen strong returns on investment. But other Virginia-based companies have backed away from SPAC deals before completion, and Richmond-based CarLotz is being sued by investors after its stock price fell dramatically.

“The SPAC market is a little saturated, but I wouldn’t write it off,” says Derek Horstmeyer, professor of finance at George Mason University’s School of Business. “While the crazy hype we saw nine months ago is down, a lot of money is sitting in SPACs, waiting to acquire companies.”

An alternative to a traditional public offering, SPACs are public shell companies that function as holders of investors’ cash for the sole purpose of merging with private companies and taking them public with less regulatory scrutiny than a typical initial public offering. In 2020, more SPAC deals were completed than IPOs, and SPACs outpaced IPOs at a rate of 2 to 1 early this year, Horstmeyer says.

The practice also benefited from a little celebrity sparkle, with tennis star Serena Williams and NBA Hall of Famer Shaquille O’Neal investing in SPACs. In March, the Securities and Exchange Commission issued an alert to potential investors: “SPAC transactions differ from traditional IPOs and have distinct risks. … Sponsors may have conflicts of interest, so their economic interests in the SPAC may differ from shareholders.”

The SPAC surge ended soon after the alert was issued, and the market has yet to recover. 

“Yes, there was some aggressive risk-taking and speculation, but on the other hand, there were and are many quality companies coming public through this structure,” says Chris Pearson, a senior vice president and portfolio manager at Davenport & Co. LLC, a Richmond-based investment company.

“The great ‘SPAC-ulation’ was followed by the ‘SPAC-ocalypse,’” Pearson says, referring to speculative excesses that swept through the market only to be met with an apocalyptic drop. “A lot of investors were unfamiliar with this structure but saw the performance and were enticed by the opportunity to make a quick and substantial buck. Not all SPACs are created equal.”

In a traditional IPO, pricing can change until the night before shares start trading.

“A SPAC is more efficient because the money has already been raised and held in a trust,” says Kristi Marvin, CEO and founder of SPACInsider, a data and research provider for the SPAC asset class.

“Not all SPACs are created equal,” says Chris Pearson, senior vice president and portfolio manager with Richmond-based Davenport & Co. Photo by Matthew R.O. Brown
“Not all SPACs are created equal,” says Chris Pearson, senior vice president and portfolio manager with Richmond-based Davenport & Co. Photo by Matthew R.O. Brown

Companies could spend months getting ready for a traditional IPO, she says, only to have something unrelated happen in the market that delays the deal on the night it’s supposed to be priced.

“That is partly why SPACs were so popular [in 2020 and early this year] during COVID,” Marvin says. “The traditional IPO window was shut, but the SPAC window was still open.”

However, Pearson notes that some merger deals involved subpar companies with overly lofty projections.

In turn, some investors got burned. Now, regulators are looking more closely at SPACs, clamping down on the accounting procedure, and 19 class-action lawsuits concerning SPACs have been filed this year, including a high-profile suit questioning the legality of a proposed SPAC deal sponsored by hedge fund billionaire William Ackman.

Ackman, founder of the largest-ever SPAC, Pershing Square Tontine Holdings Ltd., said in August that he will return the $4 billion in investments in the stock deal between his company and Universal Music Group N.V. He claims the lawsuit is meritless but adds it is unlikely to be resolved quickly.

Industry insiders are watching how this lawsuit will play out, since it could have a significant impact on how SPACs are structured in the future, experts say.

Meanwhile, several blank-check deals announced this year have not been completed. Most companies are looking for deals that are trading below their listing prices — typically $10 a share. At the height of the boom, stock prices almost always rose after SPAC deals were announced. That’s not the case anymore.

Faster and easier

One benefit of the SPAC arrangement over IPOs is flexibility for investors, who can choose to pull their money before a merger is completed. They are more likely to do so if the stock is trading below list price, experts say.

Hundreds of SPACs are searching for private companies to buy and take public. They typically have two years to find and merge with private companies or they must return money raised from investors.

A SPAC consists of two basic transactions — the IPO of the SPAC itself and its subse-quent merger. The acquired company takes the SPAC’s place on the stock market.

Year-to-date as of mid-September, 435 SPACs had gone through the IPO process, raising a total of $125.9 billion for an average public offering of $289.3 million, according to SPACInsider.

By comparison, only 59 SPACs became public in 2019, underscoring the sharp rise in their numbers in a short period of time, the trade publication reported.

The SPAC strategy is often quicker than a traditional IPO. Once a target company is found, a merger can be completed in months versus a year or more with a traditional IPO. Also, in a SPAC deal, the company going public can make business projections, which is not allowed in a traditional public offering. 

Up until March, “the market was really robust, with almost 100 SPAC deals landing every month,” says George Geis, law professor and expert in corporate law and finance at the University of Virginia. “Now we’re down to nine or 10 a month.”

Although SPACs have been around for years, the recent enthusiasm built on its own momentum, Geis says.

“The flavor of the day — where people rushed in for chances to get quick gains on their investments — has fallen a little out of favor,” says Brent Allred, business professor at William & Mary’s Raymond A. Mason School of Business.

“Tighter regulatory oversight has added a level of complexity,” he adds, but it could provide greater shareholder protection and awareness.

“SPACs are not necessarily the utopia mechanics for going public,” Allred says. “Without the scrutiny [of traditional IPOs], some SPAC deals turned out well, but others came back to bite the shareholders.”

Despite the pullback this year, Pearson sees continued opportunities for SPAC deals. Success will be company-specific going forward, he says. “It comes back to what wins in the long term and what creates value for shareholders.” 

There’s also considerable demand. A total of 452 SPACs, including some that completed public offerings in 2019 and 2020, are searching for new target companies — typically young startups with potential but unproven track records in hot sectors like tech or green energy. The firms tend to be smaller and potentially riskier than those going through a traditional IPO.

Some, especially those with no revenue, typically would stay private longer, but with a SPAC, they can tap into public markets earlier to raise capital and fuel growth.

A mixed bag

In Virginia, Tysons-based Cvent Inc., an event management company, said in July that it plans to merge with San Francisco-based SPAC Dragoneer Growth Opportunities Corp., which trades on Nasdaq. The deal — expected to close in the fourth quarter — values the private-equity-owned company at $5.3 billion.

Other Virginia deals include BlackSky Technology, a geospatial intelligence and global monitoring firm, which debuted Sept. 10 on the New York Stock Exchange after merging with Osprey Technology Acquisition Corp., a Philadelphia-based SPAC.

NavSight Holdings Inc., a Reston-based SPAC, merged in August with Spire Global Inc., a San Francisco-based data and analytics firm. Shares started trading on the NYSE Aug. 17 under the “SPIR” stock symbol.

Richmond-based used-car consignment retailer CarLotz went public via SPAC in January, but saw its stock price fall by 65% by mid-September. Photo by Scott Elmquist
Richmond-based used-car consignment retailer CarLotz went public via SPAC in January, but saw its stock price fall by 65% by mid-September. Photo by Scott Elmquist

Also in August, McLean-based IronNet closed its deal — announced in March — with LGL Systems Acquisition Corp. The stock, trading under the IRNT ticker symbol, opened above the $10 listing price and flirted with the $40 range by mid-September.

Richmond-based CarLotz, a used-car consignment retailer, has not fared as well since going public in January by partnering with Acamar Partners Acquisition Corp.

Its stock price, which hit $11.25 on the first day of trading on Nasdaq, fell in mid-September to the $4 range. Analysts say CarLotz faces headwinds — including a global shortage of semiconductors — that make it difficult for the company to operate. But investors are not pleased. They have sued in the Southern District of New York federal court, claiming the company violated federal securities law. 

Other Virginia deals have fallen through in light of adverse market conditions and the dwindling appetite in general for SPACs.

These include Los Angeles-based SPAC Tailwind Acquisition Corp. and QOMPLX Inc., a Tysons-based risk management company for cybersecurity and insurance industries. The companies, citing market conditions, agreed in August to terminate their merger. 

And a proposed merger between Arlington-based digital news company Axios Media Inc. and San Francisco-based sports media publication The Athletic fizzled this spring. The companies had sought to join forces by forming a SPAC, The Wall Street Journal reported in March, but by May the deal had stalled.

“SPACs are highly cyclical,” says Marvin of SPACInsider.

The current downcycle was exacerbated by a regulatory change — where warrants (a contract that allows a shareholder to buy more shares in the future at a given price) had to be treated as liabilities instead of equities, she says. That change was followed by uncertain conditions, created in part by the emergence of more contagious coronavirus variants, and the pending fourth quarter, which can be dicey for the stock market.

“We are in a protracted downcycle,” Marvin says. “There are plenty of good target companies out there. The problem is the environment.”