SPACs: As offerings flounder, backers still cash in
We’re finally witnessing the “reckoning for the SPACsplosion,” said Therese Poletti in MarketWatch.com. The market had been white-hot for special-purpose acquisition companies, or SPACs. SPACs—shell companies that merge with a startup to take it public—largely displaced traditional initial public offerings last year as a route to the public markets. Investors poured $336 billion into these ventures in 2020, and $323 billion in just the first four months of this year. In March, 108 SPACs went public. Last month, though, that was down to just 13—and only one of those is trading above $10. “Regulators and investors are finally figuring out the dangers” of companies that “play fast and loose” with their disclosures. SPACs won’t “go away suddenly,” but they will almost certainly face more regulatory scrutiny. The Securities and Exchange Commission has already made “some of the biggest SPACs—including DraftKings and Virgin Galactic”—restate their financial results and is clearly looking to cool the SPAC fever.
SPACs aren’t the only investment frenzy carrying a “whiff of absurdity,” said The Economist. Meme stocks, digital currencies, nonfungible tokens have all had their “to the moon” moments. So, some market discipline is welcome. The waning investor appetite “is a healthy sign of the market maturing.” But the sell-off has been especially punishing for individual investors, said Amrith Ramkumar in The Wall Street Journal. SPACs are essentially risk-free for early backers like hedge funds, who receive warrants allowing them to reclaim their investment if they don’t like the deal. It’s even better for creators, or sponsors, who get a 20 percent stake at a deep discount and often “make money even if the company they take public struggles.”
One person who doesn’t seem worried at all is the “King of SPACs,” said Zeke Faux in Bloomberg Businessweek. Chamath Palihapitiya, a former Facebook executive, has been especially adept at cashing in on the SPAC hype. Already a billionaire, Palihapitiya is a social media sensation with 1.5 million followers, who have been eager to invest in his deals. Cocky and self-assured, he seems “like the kind of guy who’d take pleasure in calling BS on current stock market hype—if he wasn’t the one behind it.” Palihapitiya’s deals have been very profitable for him and his partners, and less so for the ordinary investors. On one healthcare startup, Clover, he and his partners almost doubled their $171 million investment, to $320 million. Meanwhile, ordinary investors who bought shares in Clover have seen the value of their investment fall 30 percent. Palihapitiya is unfazed by these kinds of results and still has plans to take 26 companies public, “one for every letter of the alphabet.”