What the SPAC frenzy tells us about the market and ourselves
As Wall Street flits from one craze to the next; GameStop (GME), Bitcoin (BTC-USD) and now SPACs, the message is clear. If only we could act upon it. As a way of looking into this ongoing mania of mini-manias, I’ve turned my attention to the latest boom, SPACs, once a quirky, backwater of a security, now all the rage.
Let’s start with Kap, who has a SPAC.
That being former San Francisco 49ers quarterback, Colin Kaepernick—famous for taking a knee during the national anthem—who has co-founded Mission Advancement Corp, a SPAC, (the word rhymes with ‘clack’) or special purpose acquisition corporation, also known as a blank check company.
Kaepernick’s SPAC will look to invest in companies with a social justice mission. Oscar-nominated filmmaker Ava DuVernay and Silicon Valley VC Ben Horowitz are on its board of advisors. Private equity executive Jahm Najafi, part owner of the NBA’s Phoenix Suns, is the company CEO.
Not surprisingly there’s some eye rolling. “Colin Kaepernick becomes latest athlete to join Wall Street’s SPAC craze” read the New York Post headline (and indeed Shaquille O'Neal and Alex Rodriguez also have SPACs.) And then there’s Fox Business which framed it this way: “Colin Kaepernick plans to raise $250M for social justice SPAC: The board of directors is completely made up of Black, Indigenous and people of color and represented by a female majority.” (As you might imagine, the comments are toxic.)
Politics aside, will Kaepernick’s SPAC make any sense? Will it make any money? Kaepernick does have business experience working with Nike, Medium, Apple and others, and he’s not the CEO anyway. But the truth is, and by definition, we have no idea, because as a new SPAC, Mission hasn’t invested in anything yet. So who knows.
That’s the thing about SPACs. The more you dig into them, the more you realize they’re opaque and complicated. They’re also red hot. And that’s not necessarily a great combination.
The growth has been wack. In 2019, according to SPACInsider, 59 SPACs worth $13 billion were created. Last year there were 248 worth $83 billion. And already, just six weeks into this year, there are 135 SPACs which have raised $40 billion. Many more are on tap.
We’ll get back to what that means in the big picture, but first let’s journey deeper into the nitty-gritty of SPACs.
Here’s some more basic concepts:
-A SPAC is a shell company formed to go public for the purpose of acquiring an existing company typically within two years. It’s really a way for a company to go public without doing an IPO, (more on that later.)
-Sometimes SPAC sponsors have a target in mind, sometimes they don’t.
-Typically hedge funds and traders bought SPACs to arbitrage prices of SPAC securities (common stock, warrants and loans—trust me it’s complicated.) But now plain-vanilla investors, both professional and retail, are snapping up SPAC shares.
-SPAC shares are usually issued at $10 and used to trade around that price until a deal is announced, but during this frenzy they have been spiking on rumors. (More on that later too.)
Essentially SPACs allow sponsors to make big money—for a nominal investment they get a 20% cut of the deal—and for companies to go public. DraftKings (DKNG), Virgin Galactic (SPCE) and Nikola (NKLA) all went public through a SPAC last year. The success of DraftKings in particular served as a clarion call. In fact the volume of new SPACs is now outpacing traditional IPOs, according to this excellent graphic made by The Wall Street Journal.
As for you, Mr. and Ms. Investor, you are just along for the ride.
SPACs have been around since at least 1993, according to this great Bloomberg explainer in the Seattle Times, so why are they hot again now?
Much of it has to do with the one-off year that was 2020. “There were lots of high growth companies needing capital and the traditional IPO process, which takes twice as long anyway, is far riskier in a pandemic and an election year,” says Kristi Marvin of SPACInisder. She also notes that with a SPAC a company can shill itself by predicting forward earnings, which it couldn’t do in an IPO. “Plus, as a huge bonus,” she says, “you get to go public with a high profile, seasoned executive, like David Cote, who immediately brings a ton of value to your company.”
Ah Dave Cote. Remember him? Former CEO of Honeywell (HON), who had a great run there. As it turns out, Cote may be partly responsible for the SPAC surge. Here’s that story: Cote stepped down as CEO of HON in March 2017 and began to poke around. “Yes, I wrote a book, but I didn’t want to do what other ex-CEOs did, I wanted to do something different,” Cote tells me.
“A friend of mine who I respect suggested doing a SPAC, so I took a long hard look. Over the course of a year, I would say 80% to 90% of the people I spoke with told me not to do one. That it would hurt my reputation. And so I was careful. I didn’t want an asterisk next to my name: ‘Was CEO of Honeywell and also had this lame-ass SPAC.’ But finally I decided there was something there.”
And so Cote teamed up with John Waldron at Goldman Sachs, who was also exploring the idea of getting into SPACs. They took the plunge in September 2018, forming GS Acquisition Holdings Corp., with Cote as executive chairman. A little over a year later, their SPAC bought control of Vertiv, a Columbus Ohio-based provider of equipment and services for data centers, from Platinum Equity, a private equity firm run by the billionaire owner of the Detroit Pistons, Tom Gores. The stock [VRT] which dipped down to $5 in the darkness of last March, is now trading at $21.
“When we announced the deal in December of 2019, we were flooded with calls,” says Cote. “I joked with John [Waldron] that we kicked this whole thing off and no one remembers us.”
Which might be understandable given all the bold-faced names I’ve already mentioned in SPACs, along with others I haven’t like Chamath Palihapitiya, (him again), Bill Ackman, Billy Beane, Kevin Systrom, Peter Guber, Ciara, Paul Ryan, Nobel Prize–winning economist Richard Thaler, Gary Cohn, Jay Z, Dan Och, 23andMe, Softbank, SoFi, former Boeing CEO Dennis Muilenburg, Telco billionaire Crag McCaw, Elliot Management, and KKR.
Also, Adam Lashinksy of Business Insider notes that “a SPAC called Forest Road Acquisition associated with the ex-Disney execs Kevin Mayer [also ex-TikTok] and Thomas Skaggs is buying the well-regarded fitness company Beachbody...Stanford professor Fei-Fei Li and Kristina Salen, the chief financial officer of World Wrestling Entertainment, are on the team that's advising the SPAC started by the entrepreneurs Reid Hoffman and Mark Pincus.”
And there are hundreds of lesser known players too.
Andrew Ross Sorkin pretty much summed it up with the latest Wall Street zinger in his recent column “I know more people who have a SPAC than have Covid.” (Ba rump-bump.)
To be clear, celebs in a SPAC aren’t necessarily a red flag (they’re there for deal flow after all), as long as they’re matched up with a legit team. In SPACs, since there is no investment yet, the team is the thing.
Naturally there’s a subreddit for SPACs, (“Let’s Talk About SPACs, Baby”), which is, well, just what you’d imagine it to be.
And naturally there are SPAC ETFs too. “This is the first time you’re able to access private equity-like investments,” says Paul Dellaquila, president of Defiance ETFs, which launched the first SPAC-only ETF (SPAK) last October. “Even the traditional IPO process is very closed off. You and I are not going to get a Snowflake at $120 like Warren Buffett; we come in later. That’s most retail investors' experiences.”
“Are SPACs right for everybody?” asks Dellaquila. “No. If you’re 75 years old living on a fixed income trying to get 3% or 4% per year to sustain yourself, it’s not for you. Are SPACs right for the right investor? Absolutely. Young professionals looking for higher returns; it could be right for you. It is a leap of faith, and that’s why potential gains are big.”
But the leap might be getting bigger.
With money flooding into SPACs looking for companies to buy and ordinary investors driving up stock prices, risks are rising.
“In some cases there’s 100% speculation,” says Kristi Marvin. “The one that worries me the most right now is Churchill Capital [founded and run by veteran banker Michael Klein] About a month ago, it came out as a rumor that Churchill was in negotiations with Lucid Motors, an EV company, which retail investors love. And so they got all excited and pushed the stock into the $30s. Now, it's a month later, still no deal. That's crazy. It's a big question mark to me if this deal even happens. If there's no deal or Lucid is going to go public via direct listing or traditional IPO, or even with another SPAC, investors are all gonna be running through the door.”
Michael Klausner, a Stanford Law School professor who co-authored a study last November entitled “A Sober Look at SPACs,” has an even, well, more sober view: “I think SPACs are fundamentally not a good structure by which to take a company public, therefore I think the spike in SPACs is not a good thing,” he says. Klausner cites the 20% cut taken by sponsors as just one reason. “Moreover, the glut of SPACs that will be competing for targets is not a good thing. So, I guess my conclusion is the spike in SPACs is doubly not a good thing.”
The Wall Street Journal did a piece in November calling into question the performance of SPACs: “SPACs have a poor record of delivering returns. Of 107 that have gone public since 2015 and executed deals, the average return on their common stock has been a loss of 1.4%, according to Renaissance Capital, a research and investment-management firm. During the same period, the average return of companies that went public via IPOs was 49%, the firm says.”
‘Climactic sense of frenzy’
So you might ask, where are the regulators, the SEC in particular, in all this? Former SEC commish Jay Clayton, a regulation-light kinda guy, noted that SPACs might have issues with transparency.
Ditto for former SEC Commissioner Harvey Pitt who spoke with Yahoo Finance’s Adam Shapiro and Seana Smith this week: “I think there are questions about SPACs and their effect on the market,” Pitt said. “There are also questions about the disclosures that are made and the uses for which the funds raised are put. But in general, raising funds to acquire other companies is itself a very accepted course of conduct. And it's one that's been around for a long time, although not quite in the context we're now seeing it.” Some speculate that Gary Gensler, nominated to succeed Clayton, might take a more active position when it comes to SPACs, but that’s unknown for now.
Understand though that the SEC may not be as interventionist as some would like. “The SEC’s regulatory mandate is as a disclosure regulator rather than a merit regulator,” says Michael Piwowar, who served as a commissioner and acting chairman during his tenure at the SEC from 2013 to 2018. He now works as executive director of the Milken Institute Center for Financial Markets.
“The SEC makes no judgment as to whether it is a good or bad investment,” says Piwowar. “It often comes down to balancing two parts of the agency’s mission–protecting investors and facilitating capital formation. To gauge Gary Gensler, look to his comments during his upcoming nomination hearing and public statements early in his term.”
But if the regulators did decide to act, would they be able to act fast enough? “No matter what the policy makers do, they’re closing the barn doors after everybody has left,” says Peter Atwater, founder of research firm Financial Insyghts. “They throw water on a fire that was already going out.”
To Atwater’s mind, the collapse of SPAC mania is a “when” not “if” proposition. “The data would suggest it’s very much a very late-cycle phenomenon. I joke that the bar charts of it run the risk of looking like a middle finger by the time they’re done: Nothing, nothing, a little bit of build up, and an enormous spike. Those historically get followed by collapse. Insatiable demand is always inevitably followed by absolutely nonexistent demand. The crowd goes from wanting too much to never having it again.”
For now it’s still frothy. “I was sitting in the locker room of my golf club in Florida the other day,” says a Wall Street big shot. “And some guy yells over at me, ‘hey buddy, you got a company I can buy for my SPAC?’”
As for Kristi Marvin, she’s had to cut back the newsletter she puts out from once a week to once every two weeks. Why? “Everybody's burned out,” she says. “The lawyers, myself, the bankers, everybody's exhausted. It's so insane. When I first started the website I was covering maybe 40 SPACs and as of today, I'm covering over 500. It does make me a little nervous. We’re starting to see some deals where you're kind of like, should this team be going public?”
We always talk about what happens when these manias end. But it’s like if you’re in the trenches? “I had a little bit of PTSD,” says Martin who worked as a SPAC banker a while back. “We priced 66 deals in 2007 and 2009 there was one. I became an expert in nothing, literally overnight.”
Atwater notes too that most things of interest to SPAC investors are futuristic. “It’s EVs, space, fintech, cutting edge something that is perceived to have an enormous future to it and that is unlimited in its potential. And then you pair that with an investment vehicle that is a blank check, which itself is a very high-confidence mindset. The behavioral parallels we’re seeing in SPACs we saw on a much more narrow basis with GameStop two weeks ago. And the fact that these have overlapped is significant to me as well. It speaks to this climactic sense of frenzy.”
It’s crazy to think we all know where this is headed but there is nothing anyone can do to stop it.
This article was featured in a Saturday edition of the Morning Brief on February 13, 2021. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
Andy Serwer is editor-in-chief of Yahoo Finance. Follow him on Twitter: @serwer.
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