JPMorgan is calling the top for SPACs – and says declining day-trader interest is to blame

Stock Market Bubble

The SPAC boom that defined market euphoria in 2020 and continued into 2021 has officially peaked, according to a Wednesday note from JPMorgan.

Since February, performance in SPAC stocks has materially underperformed the S&P 500, and new deal activity with SPACs has plummeted in April following a strong start to the year.

The Defiance Next Gen SPAC Derived ETF is down 25% from its February peak, and is down 9% year-to-date.

The decline in SPAC activity has been driven by a decline in retail traders pouring money into the new deals, as well as increased regulatory scrutiny from the SEC, according to JPMorgan.

The bank highlighted that SPAC reverse mergers “come and go in waves” as they tend to exhibit boom and bust cycles.

“The boom [is] typically driven by momentum and imitation by sponsors, investors, and target companies looking to take advantage of strong equity market demand conditions, and the bust [is] typically triggered by the emergence of poor quality players, strong levels of dilution for shareholders, waning hype by retail investors and regulatory concerns,” JPMorgan explained.

So far this year, more than 308 SPAC IPOs have raised $100 billion in proceeds, according to data from SPACInsider. In 2020, 248 SPAC IPOs raised $83 billion in proceeds. More SPAC deals were raised in the first quarter of 2021 than all of 2020.

“The acceleration in SPAC activity in Q1 was so strong that was more reminiscent of a peak especially when combined with the emergence of poor quality players and regulatory scrutiny during the first quarter,” JPMorgan said.

New SPAC offerings in April have been almost non-existent, with last week marking the first week with zero new SPAC debuts for the first time since March 2020.

Read more: SPAC short-sellers have taken home $500 million in 30 days. These are the 10 most profitable blank-check companies to bet against right now.

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SPACs could drive $900 billion of dealmaking over the next 2 years despite the boom slowing, Goldman says

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Southeast Asian ride-hailing app Grab is set to go public in a $40 billion SPAC deal.

The boom in special-purpose acquisition companies, or SPACs, may have slowed of late, but it could still drive $900 billion of dealmaking over the next two years, according to Goldman Sachs.

“We estimate $129 billion of SPAC capital is currently searching for a target,” Goldman analysts, led by David Kostin, said in a note on Wednesday.

“In spite of the issuance slowdown and sell-off, SPACs could drive a total of $900 billion in M&A enterprise value in the coming 24 months.” Enterprise value is the total value of a company, including its market capitalization, cash and debt.

A record 277 blank-check companies issued shares in the first quarter, raising $91 billion from investors. It helped power the strongest first quarter for dealmaking in 40 years, topping even the dotcom bubble of 2000.

A SPAC is an entity that exists solely to list on the stock exchange to raise money, in the hope of finding and merging with a target company to take it public. They can be incredibly lucrative for early supporters, and offer companies a less onerous and costly way of listing on the stock exchange.

On April 13, Asian ride-hailing company Grab agreed to go public through a $40 billion merger with the Altimeter Growth Corp SPAC. Trading platform eToro will also list through a $10 billion SPAC deal.

But the SPAC boom has slowed in recent weeks. Just six new SPACs have come to market so far in the second quarter, Goldman said, compared to 55 at the same point in the first 3 months of the year.

Goldman said signals from US regulators that they are concerned about various aspects of the SPAC frenzy, including the reporting, accounting and governance of SPACs, has been the key factor weighing on the market.

Nonetheless, there were 394 SPACs seeking companies to take public as of Wednesday, with $129 billion of equity capital, Goldman said.

The bank’s estimate that blank-check companies could drive $900 billion in dealmaking over the coming years assumed active SPACs find targets and close deals, and that future acquisitions are structurally similar to transactions announced so far in 2021.

Goldman Sachs itself has been a key driver of the SPAC boom. The blank-check phenomenon helped power record investment banking revenues in the first quarter.

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Legendary investor Bill Miller says the window is closing on the SPAC market, but singles out 2 names that remain attractive

Bill Miller

Legendary investor Bill Miller thinks the SPAC craze may be nearing the end.

Pushed by a frenzy of excitement from retail investors and a desire from many pre-revenue companies to take an easier path to public markets, SPACs have boomed in 2020 and 2021.

“I think that game is largely winding down now,” Miller told CNBC on Tuesday. “Many of the SPACs that came public came at extraordinarily expensive valuations. But now some of them have corrected.”

The billionaire pointed to some SPACs that now have more reasonable valuations, such as Desktop Metal, a 3D metal printing technology provider that famed investor Chamath Palihapitiya also backed. The company went public in a merger with blank check company Trine Acquisition. The stock peaked at $31.25 on February 1 before tumbling to $12.70 as of April 20.

Miller also said he likes Metromile, a US-based pay-per-mile insurance technology that merged with SPAC Insu Acquisition in February. The billionaire called it the “next wave of insurance company.” Metromile shares have tumbled 50% since their public debut.

Miller also named specific stocks including Amazon, Alphabet, Facebook, and Apple, which he said his fund no longer owns.

He also singled out online car dealer Vroom.

“That’s the name we think you could make multiple times your money in the next three or four years,” he told CNBC.

SPACs, shell companies seeking to merge with private companies with the intention of taking them public, have boomed. In 2020, a total of 248 SPACs raised $83.3 billion according to SPAC Analytics. But by the fourth month of 2021 alone, 308 SPACs have raised $99.7 billion, comprising 65% of all IPOs.

Recently however, US regulators have said they will take a closer look at SPACs following the blistering pace of growth over the last year.

Paul Munter, the acting chief accountant at the Securities and Exchange Commission, in April cautioned SPAC investors about the risks and governance issues that come with raising capital through blank check companies.

In March, the SEC has begun an inquiry into the SPAC craze, seeking voluntary information from market participants.

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A major hedge fund warns of the ‘awful returns’ generated by SPACs – and says it’s ramping up short bets against blank-check companies

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CNBC’s Kelly Evans moderates the Global Stage panel with Paul Marshall, Chief Investment Officer and Chairman, Marshall Wace LLP at the CNBC Institutional Investor Delivering Alpha Conference in New York.

  • Paul Marshall, co-founder of hedge fund Marshall Wace, is sounding alarms over blank-check companies, which he said have delivered “awful returns,” Bloomberg reported.
  • Marshall also said his hedge fund is ramping up short bets against SPACs.
  • “The SPAC phenomenon will end badly and leave many casualties,” he said.
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The co-founder of London-based hedge fund Marshall Wace is sounding the alarm over blank-check companies, which he said have delivered “awful returns,” Bloomberg reported. The British investor also said he is ramping up short bets against special purpose acquisition companies, or SPACs.

In a newsletter addressed to his investors, Paul Marshall said that the SPAC market is overrun with “perverse incentives”.

SPACs are shell companies seeking to merge with private companies with the intention of taking them public.

“The SPAC phenomenon will end badly and leave many casualties,” said Marshall, who, in the past has lost money betting on SPACs. He disclosed to Bloomberg that his hedge fund has around $1 billion of gross exposure to SPACs.

Marshall’s firm, which manages $55 billion of assets, owns or has owned “almost every SPAC” on the long side.

“We have increasing exposure on the short side as the SPACs go ex-deal and the low caliber of the deals, and even the potential for bezzle, becomes apparent,” he told Bloomberg. “Bezzle” refers to the period in which an embezzler has stolen money without the victim realizing yet.

The billionaire’s warning comes amid a SPAC boom that has dominated financial markets in 2020 and 2021.

In 2020, a total of 248 SPACs raised $83.3 billion according to SPAC Analytics. But by the fourth month of 2021 alone, 308 SPACs have raised $99.7 billion, comprising 65% of all IPOs.

Paul Munter, the acting chief accountant at the Securities and Exchange Commission, in April cautioned SPAC dealmakers about the risks and governance issues that come with raising capital through blank check companies.

In March, the SEC has begun an inquiry into the SPAC craze by seeking voluntary information. The agency requested details on how underwriting banks manage the risks involved with special-purpose acquisition companies.

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Bill Gates says companies have gone from staying private too long to going public too soon and that he’s avoiding ‘low quality’ SPACs

Bill Gates
  • Bill Gates believes some companies may be going public too soon amid a SPAC boom.
  • The billionaire said he will be sticking to “higher quality” SPACs in this environment.
  • Gates emphasized the need for “extreme” disclosures to protect investors from early-stage investing risks.
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Bill Gates said he believes companies have “flipped” from staying private too long to going public too soon, in an interview with CNBC on Friday.

The billionaire Microsoft co-founder added that he will be avoiding “low quality” special purpose acquisition companies (SPACs) that have flooded the market and sticking with “higher quality” options.

Gates sat down with CNBC’s Becky Quick and former US Treasury Secretary Hank Paulson to discuss his climate-related work for the economic club of New York on Friday. In the interview, the billionaire philanthropist was asked about the rise of SPACs and whether or not they would be a benefit to “green” startups.

SPACs have raised more money in the first quarter of 2021 than they did in all of 2020, raking in more than $97 billion in just three months, according to data from SPAC Research.

Gates emphasized the capital intensive nature of climate change solutions and green companies and said that if investors are willing to take the risk, cash from capital markets would allow “green product companies” to “improve their balance sheet and get capital for projects because the markets are saying this is important.”

On the other hand, Gates warned about the risks in early-stage investments, saying, “you’ve got to make sure your disclosure about the risks is really extreme.”

He also noted that “we’ve kind of flipped from a world where companies would probably stay private too long, to now where, unless you’re tasteful, some of these companies may be going public too soon.”

Gates added that “there will be quality companies that SPAC,” but emphasized there will also be “low-quality companies” that choose to take advantage of the SPAC boom. Gates said he will be looking to stay involved in the only higher-quality offerings.

After a meteoric rise in SPACs over the past two years, there’s been some evidence that the SPAC market is beginning to cool.

Specifically, SPAC IPO prices have begun to fall. In fact, some 93% of SPACs that went public in the last week of March traded below their $10 initial offering price, per Reuters.

SPAC ETFs are also taking a hit, the Defiance Next Gen SPAC Derived ETF (SPAK) has fallen 23% from February 17 record highs.

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The SPAC boom is losing steam. Here are 3 signs the high-flying market is coming back down to earth.

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  • SPACs have raised more money in the first three months of 2021 than all of 2020, but the market may be losing steam.
  • The recent performance of blank-check companies has disappointed in the last month.
  • Also, firms and individual investors are increasingly growing cautious about the risks of SPAC investing.
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SPACs have raised more money so far in 2021 than all of 2020, but there’s some signs that the market is losing steam.

Here are three recent trends that show that the high-flying SPAC market may be coming back down to earth.

(1) SPAC IPO prices are fizzling

It’s been a rough month for blank-check companies that have gone public. According to Dealogic data compiled by Reuters, 93% of SPACs that went public over the last week are trading below par value or $10 per share.

Additionally, the biggest first-day gain of a SPAC IPO this month was a mere 3.5% for Supernova Partners Acquisition Co II Ltd on March 1. That pales in comparison to to January’s first-day pop of 32.5% for Altimeter Growth Corp II and February’s best first-day jump of 24.9% for CM Life Sciences II.

SPCX-an exchange traded fund that generally holds shares of SPACs looking for target companies to acquire-is down 6% over the last month. However, it has still returned 10% year-to-date.

On March 8, JPMorgan said in a note that the recent acceleration of SPACs suggested a peak for the sector rather than the middle of a boom cycle. They cited recent drawdowns in SPAC performance relative to the benchmark S&P 500 index to back up their view.

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The strategists didn’t detail when the peak would end, but said it’s reasonable to assume that the monthly pace of SPAC transactions for the remainder of 2021 will slow.

(2) Companies that have gone public via a SPAC are also taking a hit

The SPXZ exchange-traded fund holds roughly two-thirds of SPACS that have chosen to take a company public and one third blank-check entities seeking start-ups. It’s slumped 12% over the last month and lost 21% year-to-date.

In addition, the Defiance Next Gen SPAC Derived ETF (SPAK), an index-tracking fund that holds about 40% SPACs and 60% post-deal companies, is down 11.7% in the last month and down 8% year-to-date.

(3) Cooling investor sentiment

There’s also signs that investors are growing increasingly cautious on the rise in SPACs. David Trainer, CEO of investment research firm New Constructs, told Insider that investors are beginning to see through the fragile economic foundations of certain SPACs and “deservedly cutting valuations.”

On Wednesday, Billionaire investor Barry Sternlicht told CNBC on Wednesday the SPAC market is “out of control,” while last month Berkshire Hathaway vice-chairman Charlie Munger said the SPAC craze “must end badly,” but he isn’t sure when it will happen.

Much of the criticism of SPACs stems from the fact that they don’t face as much regulatory scrutiny as a traditional IPO before going public.

UBS is barring its financial advisors from pitching certain SPAC stocks to its clients because of a lack of information and research on the blank-check investment vehicles prior to their mergers with private companies.

JPMorgan says that SPACs have been used for decades but appear to progress through boom and bust cycles.

The boom is typically driven by momentum, then imitation from sponsors, investors and target companies looking to take advantage of strong demand. Meanwhile, the bust occurs when too many poor quality players emerge, investor excitement fizzles and regulatory concerts arise, the firm said in a note.

Still, some see the recent pullback in SPACs as a temporary dip, and even a buying opportunity for investors who missed the beginning of the SPAC market’s bull run.

Sylvia Jablonski, Defiance ETFs chief investment officer, told Insider that recent fluctuations in the 10-year Treasury yield may have impacted investor interest in growth companies, the kinds of companies SPACs typically target.

“In my mind, this is a perfect opportunity for buying on a dip as the long term prospects for the world’s most innovative, disruptive and new emerging technologies will likely reward investors over time,” Jablonski said.

David Trainer said it’s unclear if the SPAC mania is truly over. He said given the wild ride GameStop has been on of late, “there appears to be no end to the gullibility of a large number of investors.”

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The red-hot SPAC market is cooling off as first-day trading spikes evaporate

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The red-hot SPAC market looks to be cooling off as first-day trading spikes that were common in the space earlier this year begin to evaporate.

93% of SPACs that went public over the last week are trading below par value or $10 per share, per Dealogic data compiled by Reuters, That’s 14 out of 15 SPACs this week alone trading below their IPO price.

The biggest first-day jump of a SPAC this month was just 3.5% for Supernova Partners Acquisition Co II Ltd on March 1.

That’s compared to January’s largest first-day pop of 32.5% for Altimeter Growth Corp II and February’s best first-day jump of 24.9% for CM Life Sciences II, per Reuters.

SPACs are “blank check” firms that go public with nothing but cash on their balance sheet. Their sole goal is to merge with or acquire a private company allowing that business to skip the traditional IPO process to make its public debut.

There’s no doubt the SPAC market is booming. SPACs have raised $87.9 billion so far in 2021, according to data from SPAC Research. That’s already more than all of 2020 when SPACs raised $82.1 billion, per Dealogic.

The incredible rise of SPACs means the blank check firms now have over $1 trillion in spending power.

Unfortunately, the rise in SPACs hasn’t always led to great returns for investors, especially retail investors.

According to data from “A Sober Look at SPACs” by Klausner, Ohlrogge, and Ruan 2020, average returns for SPACs 12 months after their merger were negative 34.9% between January 2019 and June 2020.

Billionaire investor Barry Sternlicht told CNBC on Wednesday he believes the SPAC market is “out of control.” These days “if you can walk, you can do a SPAC,” Sternlicht said.

The CEO and Chairman of Starwood Capital, which operates six SPACs of its own, warned about the lack of due diligence done by SPAC sponsors. Sternlicht also said the recent poor performance of SPACs is partly a result of a tech sell-off, because a lot of SPACs are tech-focused.

“People are also beginning to question the euphoria and retail investors are unable to keep up with all these names,” Sternlich told Reuters.

Sternlicht isn’t the only one questioning SPACs recent rise either.

UBS barred financial advisors from making SPAC pitches to clients due to limited availability of research on SPACs before their mergers with private companies. All of this bearish news may be weighing on SPACs’ first-day results.

Read more: Hedge funds are ramping up bets against Chamath Palihapitiya’s SPACs and have already taken home $40 million this year. Here’s a detailed look at the wagers they’re making.

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Short-sellers have tripled bets against SPACs since the start of 2021 amid fears the blank-check frenzy has gone too far

Stock Market Bubble
  • More and more short-sellers are beginning to turn their attention to SPACs, which have experienced a boom in 2021.
  • They’ve more than tripled their bets against SPACs to $2.7 billion since the beginning of the year, according to data from S3 Partners.
  • Recent SPACs that have been targets of high profile short-sellers include XL Fleet and Lordstown Motors, among others.
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SPAC IPOs have been all the rage since the COVID-19 pandemic began, and the trend has only accelerated in 2021. Now short-sellers are beginning to take notice.

The group of investors has tripled bearish bets against SPACs to $2.7 billion, from $724 million at the start of the year, according to data from S3 Partners first reported by The Wall Street Journal.

Short-sellers have a lot of SPACs to sift through, given that the $166 billion raised by SPACs in the first quarter of 2021 exceeds all of the SPAC deals formed in 2020. But high-profile short-sellers seem to be having no problem finding their targets.

Muddy Water’s Carson Block released a report earlier this month on XL Fleet, a recent SPAC IPO that, according to Block, misled investors on an inflated revenue backlog for its retrofitted hybrid vehicles. The share price of XL Fleet has yet to recover from Block’s short report.

Short-seller firm Hindenburg Research, which rose to fame last year after it released a damaging short-report on Nikola, has also had success targeting SPAC firms. Hindenburg released a report on Lordstown Motors last week, alleging that the SPAC-merged company has “no revenue and no sellable product.” Shares of Lordstown dipped more than 20% and have yet to recover from the decline.

Even the SPACs led by billionaire investor Chamath Palihapitiya have been unable to avoid the scrutiny of short-sellers. Palihapitiya’s recent Social Capital SPAC merger with fintech firm SoFi has more than 20% of its share float sold short, according to data from Finviz.

Besides the underlying business concerns raised by short-sellers for SPACs, underlying trends in interest rates could be helping their bets against SPAC mergers. A majority of the companies going public via SPAC merger are not profitable, and don’t forecast profitability until years down the road.

The dearth of profits hasn’t jived well with investors as interest rates have risen over the past few months, sparking a rotation out of high-tech growth companies and into cyclical stocks in the energy and financial sectors.

Read more: ‘It’s been a motherf—ing rocket ride’ : A top NFT artist who’s sold over $60 million worth of crypto art breaks down how he’s capitalizing on the sudden boom – and shares how he positions his own portfolio

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SPAC activity may be peaking right now and will slow for the rest of 2021, JPMorgan says

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Traders work on the main trading floor of the New York Stock Exchange March 21, 2007.


The end of the SPAC mania could be near, according to JPMorgan.

In a Friday note a team of quantitative strategists led by Nikolaos Panigirtzoglou said that the pace of SPAC activity in 2021 is indicating the current SPAC cycle may be ending soon.

“This year’s acceleration in SPAC activity has been so strong that [it] is more reminiscent of a peak rather than the beginning or middle of a boom SPAC cycle. This is especially true if one looks at the recent performance of SPACs,” the strategists wrote.

In just 2021 alone, there have been 248 SPAC IPOs, according to SpacInsider. However, according to JPMorgan and Bloomberg data, the performance of SPACs has disappointed in the last month.

SPACs graph

The strategists highlighted how SPACs and reverse mergers have been used for decades but appear to come and go in boom and bust cycles. The boom is driven by momentum and imitation from sponsors, investors and target companies looking to take advantage of strong demand, while the bust is driven by the emergence of poor quality players, hype dying down, and regulatory concerns.

The strategists didn’t detail when the peak would end, but said it’s reasonable to assume that the monthly pace of SPAC transactions for the remainder of 2021 will slow.

JPMorgan’s SPAC forecast comes as more investors are sounding the alarm that the rise of blank-check companies has gone too far.

Last month, Berkshire Hathaway vice-chairman Charlie Munger said the SPAC craze “must end badly,” but he isn’t sure when it will happen.

“Crazy speculation in enterprises not even found or picked out yet is a sign of an irritating bubble,” Munger said. “The investment banking profession will sell sh-t as long as sh-t can be sold.”

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