The Defiance Next Gen SPAC-Derived Exchange Traded Fund, which lists special-purpose acquisition companies (SPACs) and the businesses that have gone public through them, has lost 30 percent of its value since mid-February and recently touched a six-month low, the Wall Street Journal reported.
A SPAC is a publicly traded company that has no assets and exists to take over a promising private company. The SPAC and the company then merge, the SPAC disappears, and the SPAC’s shareholders then own shares in the newly public firm.
The private firms targeted or owned by SPACs are not subject to regulatory rules and therefore can make blue-sky projections that public firms cannot.
Investors have seen SPACs as a vehicle to invest in exciting young companies before the companies go public.
SPACs have raised $103 billion this year, according to data firm SPAC Research.
However, SPAC’s creators are given the option to buy shares of the merged company at deep discounts, meaning those insiders often can ride out share price declines while retail investors take the retail risk and bear the brunt of losses.
Market values of QuantumScape, Virgin Galactic Holdings, and many other companies that tied their fortunes to SPACs have tumbled 50 percent or more since mid-February, the WSJ noted.
During the first three months of this year, SPACs’ market prices were steadily rising, even for ventures that had no assets or takeover targets.
Fears the U.S. Federal Reserve will raise interest rates or cut back its generous bond-buying program have helped to drive down SPAC values.
TREND FORECAST: SPACS have favored young tech stocks, which are often cash-hungry but a bad bet if interest rates rise.
Also, an uncertain economic outlook makes fast-growing companies riskier.
In addition, regulators have signaled a greater interest in looking into SPACs and their structures, raising the specter that some of the ventures might need to restate earnings or could lose their cachet in other ways.
As we have forecast, the guise of buying privately-held companies and then listing them on the stock exchange casino to drive up their value and cash in big is reminiscent of the dot-com boom and the subprime mortgage fiasco. Indeed, it is representative of the entire equity market rally, which has boomed during the COVID War, as hundreds of millions of lives and livelihoods have been destroyed across the globe.