Once-hot SPACs return to Earth
NEW YORK — The spectacular run for the investing phenomenon known as SPACs, once the hottest thing on Wall Street, has fizzled so much that many have been relegated to the bargain bin.
These special purpose acquisition companies are often called “blank-check companies” because they have no real business other than hunting for privately owned businesses to buy. They do that armed with cash provided by investors who bought into the SPAC’s initial public offering.
SPACs exploded in popularity last year, and the furor reached a fever pitch early in 2021 when they were raising an average of $6 billion every week. They offered companies like DraftKings, SoFi and 23andMe a quicker way to get their shares on a stock exchange: by merging with a SPAC and taking its place on the market rather than going through a traditional IPO. And SPACs offered investors a way to get into those exciting, potentially high-growth companies.
It’s also how electric vehicle startup Lordstown Motors Corp. came to be a publicly traded company.
In October 2020, Lordstown Motors merged with New York-based DiamondPeak Holdings Corp., a SPAC formed by former Goldman Sachs executive David Hamamoto.
The company has been through its share of turmoil, which includes an investigation of the merger and preorders by the U.S. Securities and Exchange Commission. The U.S. attorneys office in Manhattan also has opened a probe into the matters.
The company — and its stock price — have begun a turnaround with the CEO appointment in August of auto industry veteran Daniel A. Ninivaggi, a firm believer the company can thrive in the electric vehicle market.
The SPAC industry got so hot that to distinguish themselves, they began touting their celebrity investors and advisers, such as baseball’s Alex Rodriguez and music’s Sammy Hagar. It got wild enough that the SEC put out a warning in March for investors not to invest in a SPAC “just because someone famous sponsors or invests in it or says it is a good investment.”
Since the spring, though, the industry’s momentum has dropped sharply. Patience may be key for investors hoping to find bargains in the SPAC world now, a sharp turnaround from the day-to-day frenzy that characterized them early this year.
Worries about increased regulatory scrutiny and periods of rising interest rates helped cool off high-growth areas of the market. SPACs also drew fire from critics who said they were examples of a dangerous bubble inflating across the stock market as investors chased the next hot thing.
As a result, only seven SPACs had IPOs last month, raising just $1.3 billion. That’s down from February’s 146, which raised $45.8 billion, according to FactSet.
Not only are fewer SPACs going public through with IPOs, the ones already in the market and still hunting for targets have seen their share prices drop. Many are trading below $10. That’s a key threshold because the cash that SPACs raise in their IPOs sits in trust accounts earning interest. If the SPAC can’t find a company to buy within the timeframe detailed in its IPO, that cash gets returned to investors, which often is just a little less than $10 per share.
More than 90 percent of active SPACs were recently trading below their par value, according to Goldman Sachs.
That means the typical SPAC still looking for a target recently was offering a 2.7 percent return if an investor bought it and simply waited until redemption, the Goldman Sachs strategists say. Of course, that could mean a wait of 17 months for the typical SPAC.
Last month, four U.S. senators, including Ohio’s Sherrod Brown, a Democrat, asked the creators of six SPACS for information that, in part, related to how the SPAC sought its investment, compensation or if the SPAC merged with or acquired another entity its creator has a financial stake in or business arrangement with. One of the letters was sent to Hamamoto.