Exactly one year ago, with the world in the grip of a deadly pandemic, Wall Street put its Covid-19 fears aside. That jumpstarted a wave of market euphoria that has since fed a boom in unusual activity, from the irrational hype around GameStop shares to a huge bitcoin rally.
Among the most notable indicators of market mania has been the explosion of special-purpose acquisition companies, or SPACs. So-called “blank check” firms, which allow investors to back sponsors that then hunt for a private entity to take public, have raised tens of billions of dollars in 2021, an increase of more than 2,000% compared to 2020.
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The rich and famous have rushed to get involved, from finance types like Bill Ackman to athletes and celebrities such as Colin Kaepernick and Jay-Z.
“Anybody who’s anybody has one,” said Peter Atwater, an adjunct professor of economics at William & Mary. He compared SPACs to another hot accessory in the world of finance — a Patagonia vest.
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More and more people are sounding the alarm. US regulators have warned that investors shouldn’t back SPACs just because there are celebrities attached. Meanwhile, short seller interest in SPACs has jumped, according to data from S3 Partners, indicating that a growing number of traders think the excitement is overblown and share prices are destined to fall.
Step back
If the SPAC frenzy has gotten out of hand, who pays the price? Experts caution that not everyone will emerge a winner — and some retail investors swept up in the madness could get hurt.
“The time for quick money feels like it’s now behind us,” Atwater said.
One concern is that there’s simply too much SPAC money chasing a limited number of solid takeover targets. That could force owners to consider acquiring less mature companies that may not meet lofty expectations for growth, or to enter into agreements that are less profitable.
“There is a tremendous number of SPACs being created every day,” Will Braeutigam, a partner and SPAC leader at Deloitte, told me. “With so many SPAC sponsors out there bidding on the same companies, the upside value that you think may be there may not be there.”
Guillermo Baygual, co-head of mergers and acquisitions for Europe, the Middle East and Africa at JPMorgan Chase, notes that not all SPACs are created equal. He believes this corner of the market will “become a more professional asset class over time,” as investors distinguish between firms with a proven track records and those created just to take advantage of the moment.
In the meantime, everyday investors that haven’t been discerning could be left holding the bag, according to Atwater. He pointed to a rush to buy shares of SPACs before takeover targets are even announced.
“You would think investors would wait to see what [they] buy,” Atwater said.
If a target isn’t identified, initial investors will get their standard $10 per share back, Atwater explained. But eager investors that want to get in ahead of a deal and pay $20, $30 or $40 per share on the open market are making bets that are purely speculative.
Some SPACs will end up as success stories. But Baygual cautioned that they’re not all a sure bet. “Investors should make their investment decisions on fundamentals,” he said.
