Why investing in SPACs is a big gamble

They were always a waste of money, and that reality is dawning. It would be mad to join the party now, says Matthew Lynn.

It now looks as if investors in London will, just as their US counterparts have for a while, be offered the curious privilege of handing over lots of money to management teams who promise to spend it on some great deals, even if what they are actually going to buy is still kept carefully under wraps.

Marwyn, a London-based sponsor of acquisition companies, has announced plans for a £500m acquisition vehicle to be listed in London.

At the same time, Sky News reported that a £150m acquisition vehicle called Finsac, set up by former executives from KBN and Munich Re, would be listed in London soon. There could be plenty more in the pipeline.

Dodging the bullet

At the height of the boom in Spacs – special purpose acquisition companies that raise millions in capital with the aim purely of buying other companies – in New York, there was plenty of criticism that London was missing out.

As so often in the past, the US market was innovating furiously, while the British one was getting left behind.

There was even a Brexit twist to the tale, as Amsterdam, London’s main rival in the equities industry now that we are out of the EU, managed to list more than 30 Spacs, while the City listed almost none. The LSE tweaked its rules to make it easier, but still no one seemed interested.

The UK might have dodged a bullet. It turns out that Spacs were not such a great idea after all.

Spacs boomed in New York in 2020 and 2021 with billions raised on little more than reputation and promises. In a single year, more than 1,000 shell companies were listed, raising a total of $160bn, with backed by a vague promise to buy something or other sometime one day soon.

The vast majority of them have proved very disappointing. Some of the most high-profile among them, such as the digital-media company BuzzFeed, have delivered terrible results.

An index of post-merger Spacs – that is, the ones that have found and acquired a target – fell by 23% in January alone, a much worse performance than the broader Nasdaq, which fell by just 9% over the same month.

A clutch of companies such as the clean-energy manufacturer Heliogen and the 3D printing start-up Matterport fell by more than 50% over the course of a single month. True, a handful, such as ChargePoint Holdings, have done well.

But the vast majority have floundered, and a worryingly large number have crashed.

A solution in search of a problem

In truth, Spacs are a waste of time and money. If a company wants to come to the market there is nothing wrong with the traditional route – come up with a clear and detailed plan, appoint advisers, issue a prospectus and sell shares. It was perfectly straightforward, and anyone who wanted to invest could make a decision based on the prospects of the business. Spacs were a poor solution to a non-existent problem.

It is hardly surprising that so many have crashed. By raising the capital first, and then trying to find a target, they put themselves in a position where they would inevitably end up wildly overpaying for anything they bought. The founders of most Spacs tried to claim that their contacts and expertise meant they could find fantastic deals that wouldn’t otherwise be available. There was not much evidence of that. In reality, the market is generally very efficient, and there are not many opportunities out there. Entrepreneurs know that they have plenty of options. They can go for a traditional initial public offering. They can sell to a venture-capital or private-equity firm, or they can persuade a bigger company to take them over. The only real reason for selling to a Spac was that it was offering a lot more cash than the business was really worth.

London was lucky to miss out on the Spac boom. Perhaps it was inertia, or laziness, or good fortune. More plausibly, perhaps, the world’s oldest and savviest financial centre simply sensed that it was a scam, and quite rightly stepped back from getting involved. Whatever the explanation, the City has had a lucky escape. And the last thing it should try and do is jump on the bandwagon a year too late.

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