A US markets watchdog official on Wednesday cautioned blank-check company dealmakers about the risks and governance issues that come with raising capital through special-purpose acquisition companies (SPACs).
Paul Munter, the acting chief accountant at the Securities and Exchange Commission, said timelines of such transactions are part of the challenges for private companies that merge with SPACs. That is because their development may still be in early stages.
“Many SPAC acquisition targets may be at an earlier stage in the entity’s development compared to companies that pursue a traditional IPO,” he said in a statement, adding target companies should have a plan to address the demands of becoming public on a speedy timeline.
Munter urged market participants to carefully consider risks, complexities, and challenges in the space, including the consideration of whether target companies are prepared to go public.
SPACs have raised $97 billion across 298 IPOs so far this year, exceeding the previous year’s record of $83 billion raised, according to data from SPACInsider.com.
But March was a rough month for companies in the space as firms and individual investors grew increasingly cautious over SPAC investing. 93% of SPACs that went public in the last few weeks of the month were trading below par value, or $10 per share. JPMorgan said SPAC acceleration may be hitting a peak and could slow for the rest of the year.
“Given the explosion in popularity of SPACs, it’s no surprise that enforcement is asking questions – this is the beginning of what I expect will be heightened scrutiny of trading and disclosures to investors arising from the surge of these transactions,” Doug Davison, partner at law firm Linklaters, said.
Hedge fund billionaire Bill Ackman is already planning a second blank-check company, although he expects to miss his own first-quarter deadline to find a first target.
The legendary investor had hoped his special purpose acquisition company (SPAC) would find a target by the end of the first quarter, but now admits this might not happen. Prior targets on the list of his Pershing Square Tontine Holdings SPAC included Airbnb, Stripe, and Bloomberg LP, according to Reuters.
“While we previously believed that we would be able to announce a potential transaction by the end of this quarter, we will not be in a position to do so,” Ackman said in a letter to investors on Monday. “We do not intend to make any announcements about PSTH’s transaction progress until we enter into a definitive agreement.”
Ackman said he believes his SPAC will be an important contributor to the hedge fund’s performance and he will likely launch a second one after completing a first merger. Investors in his first SPAC should have the right to invest in the second one “without paying a premium to its cash-in-trust value,” he wrote in the letter.
Ackman’s PSTH was the highest-profile SPAC among hedge funds in 2020, when SPACs raised $83 billion across 248 IPOs, smashing the previous record of $13.6 billion, according to SPACInsider.com. His SPAC raised a record-breaking $4 billion via proceeds from investors in July last year, along with an added $1 billion commitment from Pershing Square.
While he has not told investors which companies he was looking to take over, a previous filing stated he is drawn to “high-quality, venture-backed businesses” that could be classified as “mature unicorns.” Unicorns are privately-held startups with a valuation of more than $1 billion.
The SPAC has until July 21 next year to sign a letter of intent and six months after that to close a signed deal, according to Bloomberg.
Shares in Pershing Square Tontine fell 1.3% in pre-market trading on Tuesday.
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.
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.”
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.”
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.
WeWork lost $3.2 billion in 2020 as the pandemic forced its coworking spaces to shutter, down from $3.5 billion the year before, the Financial Times reported Monday.
Those losses came despite WeWork cutting its capital expenditures to just $49 million, down nearly 98% from $2.2 billion in 2019, as occupancy rates at its properties plummeted from 72% to 47%, according to the Times.
But WeWork is still eyeing a public offering, now through a potential merger with BowX, a special purpose acquisition company (SPAC), which counts former NBA star Shaquille O’Neal among its advisors, the report said.
WeWork declined to comment.
According to the Times, WeWork is seeking $1 billion in new funding, and hopes to go public at a valuation of $9 billion, including debt. The Wall Street Journal previously reported in January that WeWork was eying a deal with the SPAC that would value it at $10 billion.
The new valuation would be less than a fifth of the $47 billion WeWork sought when it initially announced its plans for an initial public offering in 2019. Those dreams were shattered amid revelations about the company’s shaky finances, conflicts of interest, and the wild partying culture fueled by founder and then-CEO Adam Neumann.
But one investor pitched by WeWork doubted its most recent projections, which included revenues of $7 billion by 2024, adjusted earnings of $485 million next year, and 90% occupancy rates by the end of 2022, according to the Financial Times.
Neumann, after stepping down as CEO, also sued SoftBank for backing out of buying nearly $1 billion of his WeWork shares. As part of a proposed settlement, Neumann will get a $50 million payout on top of $500 million from SoftBank for buying his shares, and will leave WeWork’s board for a year, Bloomberg reported last month, helping open the door for a public offering.
Berkshire Hathaway vice-chairman Charlie Munger blasted SPACs at the Daily Journal annual meeting on Wednesday, saying that the “world would be better off” without the investment vehicles.
“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.”
Special purpose acquisition companies, or “blank check companies,” list on a stock exchange to raise money in the hope of finding and merging with a target company to take it public. The model can be extremely lucrative for the initial sponsors of the SPAC, who take a big stake for a small sum. But it also poses risks for investors who bet on the success of the SPAC before even knowing the business that will be acquired.
Warren Buffett’s right-hand man also added that the SPAC craze “must end badly,” but he isn’t sure when that will happen.
The news of Michael Klein’s SPAC potentially merging with EV manufacturer Lucid to take the company public caused shares of the blank-check company to jump some 167% in under three weeks.
Still, Churchill Capital IV has refused to either confirm or deny the reports.
“We do not generally comment on rumors and speculation and will not comment as to whether the Company is or is not pursuing a specific business opportunity other than saying, as noted, we are always evaluating a number of potential business combinations,” the company wrote in a statement on January 19.
Despite the lack of certainty around the merger, hopes of a Lucid acquisition are pushing Churchill Capital Corp IV’s stock higher. And with The Financial Times reporting the EV manufacturer is in talks with the Public Investment Fund of Saudi Arabia to build an electric vehicle factory near the Red Sea city of Jeddah, shares of Churchill are on fire yet again.
The Financial Times spoke with the Saudi fund’s governor, Yasir Al-Rumayyan, who confirmed reports out of Bloomberg earlier this month that said Lucid was thinking of making a new factory in the kingdom.
The move by Lucid seems to be a logical step given the company’s history with the Saudia Arabian fund.
Back in 2018, a cash-strapped Lucid took in a reported $1.3 billion from the Saudis to keep operations running, an investment that was conditional on Lucid developing a production factory in Saudi Arabia, per Bloomberg.
Blank-check companies looking to merge with or acquire another company could drive $300 billion in M&A activity over the next two years, Goldman Sachs said on Monday.
About 205 special purpose acquisition companies have raised a record $70 billion in IPO proceeds year-to-date, representing a five-fold increase from 2019, strategists led by David Kostin wrote. SPAC IPOs this year account for 52% of the $124 billion raised via 356 US IPOs.
Three major factors drove investor interest in 2020, or what they called “the year of the SPAC.” These include a shift in focus from value stocks to growth stocks, retail investors keen on non-traditional and early-stage businesses, and a hunt for cash substitutes when key policy rates are near zero.
Goldman estimates that 205 SPACs will need to acquire a target in 2021 or 2022, based on their 24-month post-IPO expiration dates.
“If this year’s 5x ratio of SPAC equity capital to target M&A enterprise value persists, the aggregate enterprise value of these future takeover targets would be $300 billion,” the strategists said.
SPACs serve as a cheaper and faster alternative to the traditional IPO route as they are created solely to merge with or acquire other businesses, and take the merged entity public. Even after a SPAC goes public, it could take up to two years to find a desirable M&A target. If it doesn’t, the SPAC is liquidated, and funds raised are meant to be returned to investors.
2020 has seen prominent entrepreneurs, hedge-fund managers, and popular celebrities like Bill Ackman, Richard Branson, Michael Jordan, and Shaquille O’Neal become involved in SPACs, and the blank-check firms were led to market by investment banks like Morgan Stanley, Credit Suisse, and Goldman Sachs.
“We expect a high level of SPAC activity will continue into 2021,” Goldman Sachs said, and warned that weak post-acquisition returns represent a headwind to future SPAC issuance.
Jeremy Grantham’s early stake in battery producer QuantumScape has surged following the firm’s merger with a special-purpose acquisition company, but Grantham still isn’t sold on the blank-check IPO trend.
Grantham invested $12.5 million into the company seven years ago. That stake now stands at roughly $278 million thanks to a SPAC merger and QuantumScape’s subsequent stock rally.
The position is “by accident the single biggest investment I have ever made,” Grantham told the Financial Times.
Still, the investor sees SPACs as a “reprehensible instrument, and very very speculative by definition,” largely due to their lack of listing requirements and overall regulation.
The very kind of dealmaking that Jeremy Grantham previously deemed “reprehensible” netted the famous investor a $265 million profit.
Grantham, who founded investment management firm GMO and serves as its long-term investment strategist, invested $12.5 million in battery producer QuantumScape seven years ago as one of several stakes in early green-tech companies, according to the Financial Times. The position swelled after Kensington Capital Partners announced plans to merge QuantumScape with a special-purpose acquisition company, or SPAC, in September.
The deal valued QuantumScape at $3.3 billion, and shares traded at more than four times their listing price when the acquisition was completed on November 30. The company’s stock rallied another 31% on Tuesday alone, valuing Grantham’s stake at roughly $278 million.
Yet the legendary investor isn’t convinced Wall Street’s SPAC frenzy will last. The QuantumScape position is “by accident the single biggest investment I have ever made,” Grantham told the FT, partially fueled by the so-called blank-check companies’ lack of regulation.
“It gets around the idea of listing requirements, so it is not a useful tool for a lot of successful companies. But I think it is a reprehensible instrument, and very very speculative by definition,” he added.
Grantham’s profit stands to climb even higher. QuantumScape soared as much as 37% in early Wednesday trading. Should the rally hold into the market close, it would add another $100 million to his total gains.
SPAC firms raise capital through an initial public offering with the intention of using the cash to acquire a firm and take the merged entity public. The last two years have seen market favorites including Virgin Galactic, DraftKings, and Nikola go public through such deals.
Blank-check IPOs exploded in 2020 as firms looked to take advantage of a surge in participation from retail investors and hopes for an economic recovery. More than $74 billion has been raised across 218 SPAC debuts in 2020, according to data from SPACInsider.com. That compares to just $13.6 billion raised across 59 deals in 2019.
Wall Street’s obsession with the vehicles could be a sign of unsustainable market optimism, Grantham told the FT, rivaling the overwhelming bullishness seen during the 1920s and the late-1990s tech bubble.
Tesla’s meteoric rise through the year has made electric-vehicle SPACs – and any SPAC related to the EV market – particularly popular. QuantumScape lands in that basket. The firm produces solid-state batteries used in electric cars and has backing from industry giant Volkswagen.
Now read more markets coverage from Markets Insider and Business Insider: