Spacaphobia
Just as we thought that everyone was SPACked out by now and that the frenzy was over following the first quarter of this year when most SPACs began trading underwater Trump Media & Technology (founded by Mr. Donald Trump in February 2021) merged with Digital World Acquisition Corp. to become the latest meme stock going galactic and gaining 1,657% above its first day close. And until very recently was still the world’s best performing SPAC overtaking Iridium, Lucid Motors, DraftKings and QuantumScape (backed by VW and Bill Gates) to name a few you may have heard of! All you need is to be rich, smart or a celebrity to launch your own SPAC these days. YTD there have been 566 SPACs launched so far (equating to 63% of the capital raised in IPOs this year) and 552 are still searching for a target. More importantly, the amount of capital raised so far this year in SPAC issuance has surpassed the amount raised during the previous 18 years!
As a reminder, a SPAC is a blank-check company, a concept that has been around for the last 25 years but become more popular since last year, COVID oblige. Interestingly, the top five underwriters of SPACs over the last 5 years (a very lucrative business to which you can add leverage a la Archegos given the unlikelihood of losing money) have been Credit Suisse (No. 1 in the last 7 years until this year!), Citigroup, Goldman Sachs, Cantor Fitzgerald and Deutsche Bank. The success of the SPAC market is based on the fact that you can effectively buy a lottery ticket with a money-back guarantee in case you are not satisfied with the purchase (as long as you participate in the initial offering or buy it at or below par on the public market) – the flip side of the “risk-free” ticket is that you may have to wait up to 2 years to get your money back from an interest-bearing trust account if no deal is struck before the expiry date. And if the SPAC does end up finding a perfect match made in heaven with an entity that has no meaningful revenues, you are buying a dream or a moonshot that has a chance of ending very badly.
No surprise that the usual suspects of the hedge fund industry have been the first port of call for SPAC IPOs given the significant assets they manage and their ability to participate in PIPEs in addition to the warrants issued at par that can be traded after 2 months. The net result was that these hedge funds were able to significantly spice up their returns in 2020 with additional percentage points of performance. Despite a less glorious year for SPACs, there are many funds still specializing in the space and most are still performing very well YTD. Many of the multi-strategy hedge funds that historically shied away from the space saw an opportunity in the second quarter as many SPACs traded below their issue price creating a pull-to-par trade on a levered basis that has proved to be very profitable. At the end of September alone, 97% of SPACs outstanding were trading below par.
What many investors fail to realize is that PIPEs (Private Investment in Public Equity) are the most important part of the puzzle as the sponsors need to raise 2-3 times more money than what they get in the SPAC IPO for an acquisition to be viable. In come the hedge fund platforms (again) that can get a sneak preview and negotiate a better deal spiced up with the likes of preferred equity. The SPAC model is once again undermined if the PIPE financing fails to materialize potentially causing the share price to collapse.
Sky’s the limit when one gets into IPOs within the electric automotive industry’s Tesla wannabe’s (Amazon-backed Rivian Automotive being the latest one to become public via an IPO as opposed to a SPAC and valued as the 3rd largest auto company in the world by market cap in less than 4 trading days!). However, most of the 15 EV SPACs that have gone public since the start of 2020 (with the exception of Polestar and Lucid Motors) have seen their battery power run dry as they failed to meet their moonshot expectations. Examples include Fisker (one of the world’s first production luxury hybrid EV which already went bankrupt once even though they had the technology and the design at the time – Fisker had designed BMW’s Z8 roadster for Mr. Bond!) whilst Nikola Corp. and Lordstown Motors have been accused of “misleading” investors.
Contrast that with today’s fastest accelerating all-electric hyper car maker Rimac Automobili, another successful company created 12 years ago in the back of a garage by a 19-year old Croatian. If you are successful why would you want to raise money from strangers who are likely to pump and dump the SPAC once a reverse-merger is announced (or shortly after) when there is so much money in private equity waiting on the sidelines not to mention a potential acquiror that is already listed? Bugatti Rimac is the latest example, a joint venture between Porsche and Rimac which will eventually list next year (Bugatti will have to kiss goodbye to its 112-year petrol engine racing heritage culminating with the 8.0-litre W16 Chiron AND move its headquarters from Molsheim to Zagreb – goodbye la France!). Rimac’s founder (together with Elon Musk) was already a vivid critic of EV SPACs back in 2020 and rightly so given how challenging it is to be profitable.
In technology, the new kids on the block will always try to be more innovative than incumbents, but a SPAC is not a science project with a potential for future revenues and thus companies will need to become more serious and mature before listing. There is no reason for a SPAC to trade above its issue price before a deal is announced but as recent market participants have been playing musical chairs in FOMO (Fear Of Missing Out) we will likely have lots of disappointments to come. In addition, half of this year’s IPOs above $1 bio. are busted and trading underwater One thing is sure though, the sponsors and insiders will always make more money for themselves and the regulators will intervene at some point when it’s too late. Until then, “let the music play on…” (Barry White, 1976).
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