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After a meteoric rise, the market for SPACs is plunging back to Earth. (See “Gamblers Dump SPACs,” Trends Journal, 25 May 2021.)
A SPAC is a company that makes no product, performs no service, nor markets anything other than itself. Investors buy shares, often priced at $10 each, and the money is put into a trust. When the SPAC’s wallet is fat enough, it looks for a company to buy.
When the SPAC buys a company, the SPAC itself disappears and its shares become shares in the company the SPAC bought.
SPACs collected about $250 billion from equity investors over the past 18 months. Now, after many SPAC deals have stumbled and are trading below their initial offering price, short sellers are ready to feast on them.
As of 16 July, short sellers had bet $2.36 billion that SPACs will fall further, Bloomberg reported, tripling their wagers since the beginning of this year.
Many companies that have gone public through SPACs are burdened by regulatory risks, poor governance, or simply are unable to fulfill the blue-sky scenarios they painted to lure investors. (See “SPACs’ Value Shrinks Under Regulators’ Scrutiny,” Trends Journal, 20 April 2021.)
Under federal regulations, a SPAC has to buy a company within two years of a SPAC’s formation or refund investors’ money.
About 75 percent of existing SPACs are still shopping, according to Bloomberg, with $131 billion looking for a home.
Problem: the most promising takeover targets have already been taken over, leading speculators to bet that the current crop of SPACs will fail to make deals that will be profitable over time.
TREND FORECAST: The SPAC craze is over. Facing growing skepticism from investors as well as greater regulatory scrutiny and a softening stock market in general (see related story), short sellers will be the only group to turn a sizable profit in SPACs for the foreseeable future.