SPACs: WHAT GOES UP…

Special-purpose acquisition companies (SPACs), a sneaky way to skirt federal regulations and take fledgling companies public, was one of the hottest investment vehicles of 2021, attracting celebrities from Serena Williams to Jay-Z.

Now their temperature is sub-zero.

A SPAC or “blank-check company” is a special category of company that goes public, typically at $10 a share, even though it has no assets. When it has stockpiled enough capital, the SPAC buys and merges with a promising company that is not ready to go public by conventional means.

After the merger, the SPAC disappears, and its shareholders then own shares in the company the SPAC bought.

Because SPACs’ takeover targets are private companies that have not filed papers to make a stock offering, they can make unsupported, blue-sky financial projections about their future, which companies planning to go public by the usual route are banned from doing.

A large number of SPAC mergers have tanked, quickly falling below their opening price and never recovering. Some have been bought. Other companies that were planning to go public via SPACs have canceled the deals and are now trying to raise money privately.

SPACs were creatures of the cheap money era, when interest rates were near zero and the U.S. Federal Reserve was buying $120 billion a month in bonds. Speculation in everything from crypto to meme stocks ruled the day.

Now inflation, rising interest rates, and a slowing world economy have brought investment markets back to the real world, with investors scurrying for safety.

July was the first month in five years when no new SPACs raised money. In August, only a few have come to market so far.

If a SPAC is unable to find a company to merge with within two years of its formation, regulations require it to return investors’ money and lose the millions of dollars in costs in setting up the SPAC.

After Labor Day when the vacation season ends, “investors are waiting to see whether the stock market’s recent recovery and the new energy and climate spending package will inject new life into the SPAC market later this year,” The Wall Street Journal said.

TRENDPOST: We tracked SPACs’ meteoric rise and bumpy fall and warned of their risks in a series of articles, including:

“SPACs Beware!” (13 Apr 2021)

“SPACs’ Value Shrinks Under Regulators’ Scrutiny” (20 Apr 2021)

“SPACS: Here Today, Gone Tomorrow?” (8 Jun 2021)

“SPACs: Danger Ahead” (29 Jun 2021)

“Knives Are Out For SPACs” (24 Aug 2021) 

“Investors Turn Their Backs on SPACs” (24 May 2022).

TREND FORECAST: It will take far more than a short-term market rally to revive SPACs. They have performed so consistently poorly, and so few investors are willing to take a flier against long odds, that SPACs will be seen only rarely and in special circumstances for the foreseeable future.

And, from a different chapter of the same book, Dealogic data show the IPO game has also frozen up. With fears of the Ukraine war and its implications spreading, plus rising inflation and rising interest rates, traditional IPOs have raised only $5.1 billion so far this year. At this point last year, these offerings had raised more than $100 billion.