SPAC rout erases $75 billion in startup value4 min read . Updated: 02 Sep 2021, 06:22 PM IST
- Shares in this once-hot sector have dropped 25% since mid-February, highlighting the risk of jumping into the latest sure bet
The blank-check boom has turned into a rout.
More than six months after the SPAC craze crested, a broad selloff has wiped about $75 billion off the value of companies that came public through special-purpose acquisition companies, according to a Dow Jones Market Data analysis of figures from SPAC Research.
A group of 137 SPACs that closed mergers by mid-February have lost 25% of their combined value. At one point last month, the pullback topped $100 billion. The analysis doesn’t include companies that hadn’t closed mergers as of mid-February or those that are no longer trading.
Over the same span, an exchange-traded fund that tracks companies that recently went public through initial public offerings slid 12%. The Dow Jones Industrial Average gained 13%.
SPAC declines are concentrated in companies tied to green energy and sustainability, though the damage is widespread. About 75% of the SPACs that have announced deals but haven’t completed them are trading below their listing price. Earlier this year, when the sector was perhaps the hottest area of finance, SPACs nearly always rose after announcing deals. Now, it is common for SPACs—such as the one that said in June it is taking electric flying-taxi firm Vertical Aerospace Group Ltd. public—to unveil mergers and see their shares fall.
The retreat is hitting funds managed by firms such as BlackRock Inc. and Fidelity Investments Inc., as well as many hedge funds, pension managers and other investors that raced to put money into SPACs during the boom that began late last year. Many of these funds were early enough to invest at low prices, meaning they are still sitting on substantial gains. Indeed, the value of the sector remains about $250 billion, up from roughly $100 billion a year ago, reflecting share-price increases and new entrants.
Even so, the eye-popping returns of early this year have boomeranged on many late arrivers, highlighting the ever-present risks of piling into the latest sure thing. Some investors have watched paper fortunes dwindle in the past few months.
“I don’t tell my wife about many of the red days," said Alex Vogt, a 30-year-old physician assistant in Grand Rapids, Mich., who has most of his portfolio tied to electric-vehicle companies that merged with SPACs such as Lucid Group Inc. and ChargePoint Holdings Inc. The operator of a Twitter account called “EV SPACs," he also trades Tesla Inc. and movie-theater operator AMC Entertainment Holdings Inc., one of this year’s investor favorites.
Mr. Vogt’s portfolio surged above $1 million early this year. It fell around $600,000 in August, though it is still much higher than it was a year ago.
A SPAC is a shell company that raises money and trades on a stock exchange with the sole intent of merging with a private company and taking it public. Combining with a SPAC has become a popular alternative to a traditional initial public offering because it is often faster and lets the company going public make business projections, which aren’t allowed in a traditional IPO.
SPAC deals that value hot companies like Lucid and personal-finance app operator SoFi Technologies Inc. at a record of about $525 billion have been announced this year, Dealogic data show.
Some investors call the summer 2021 reversal an inevitable return to earth. Many companies merging with SPACs have little revenue yet carry valuations in the billions of dollars and above.
“Air has come out of the bubble," said Roy Behren, managing member at Westchester Capital Management and a SPAC investor. “That’s the cost of speculating in companies that have potentially bright but uncertain futures."
The pullback also shows the risks of trading options—which allow the holder to buy or sell an asset at a certain price in the future—and other complex securities. Many SPAC investors like Mr. Vogt trade warrants, which are securities issued by SPACs that confer the right to purchase shares under stated terms. Like options, they tend to move more than the underlying shares.
High-profile instances of electric-vehicle startups misleading investors in SPAC deals and lackluster financial results from many companies have chilled the creation of new blank-check firms and triggered share-price declines. Regulators have helped damp sentiment by increasing their scrutiny of the sector in recent months.
Share-price declines can create a negative feedback loop for SPACs, because investors have the right to pull money out of blank-check companies before mergers go through. They are much more likely to do that when SPACs trade below their listing price, which many currently are. More than 95% of the blank-check companies yet to announce deals trade below that level.
Large investor withdrawals can leave the company going public with much less cash, making it harder to meet its business targets and potentially fueling a deeper drop in the stock.
Several companies, such as home-insurance technology company Hippo Holdings Inc., have lost 80% or more of their SPAC funds in recent weeks. Shares of Hippo—which went public in a roughly $5 billion deal with a SPAC backed by LinkedIn co-founder Reid Hoffman and Mark Pincus, who founded the mobile gaming firm Zynga—are down about 60% in the past six months.
Some buyers say they knew there would be highs and lows.
“I knew I was looking for high volatility when I got into this," said Keith Williams-Parker, 38, a teacher in Virginia who has the majority of his roughly $85,000 portfolio in companies that merged with SPACs. It peaked north of $100,000 earlier this year.
Mr. Williams-Parker said he tries to emulate star technology fund manager Cathie Wood in targeting companies like SoFi and energy-storage firm Stem Inc. that have growth potential.
“I am still swinging for the fences," he said.
This story has been published from a wire agency feed without modifications to the text
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