Special purpose acquisition companies (Spacs) “are falling short of their promises”, says Rana Foroohar in the Financial Times. They are billed as a “cheaper, more efficient… way to bring new companies public” than the traditional initial public offering (IPO). Last year the vehicles “raised as much cash as they had done over the entire preceding decade”. This year “there have been 30% more Spac issuances than traditional IPOs”. Yet returns for investors often disappoint.
Spacs: the new IPO
Spacs are shell firms that list on the stockmarket in order to raise cash. They then use the money to buy an existing company, providing an alternative route for the target firm to secure a listing on public markets.
Traditional IPOs are burdensome, says Charles Duhigg in The New Yorker. There are strict rules about how much a company can communicate with the public during the pre-flotation “quiet period”. Spacs offer a simpler route to a listing. Some have dubbed Spacs the “second coming of the IPO”, says Daniele D’Alvia for theconversation.com. Another drawback of traditional flotations is that they are usually underpriced. This is to drum up interest by guaranteeing early buyers a quick profit, but from a company founder’s perspective they are leaving money “on the table”. The bubble may already have burst: “only 30 Spac flotations took place in April and May” compared with 299 in the first quarter of 2021.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The slowdown in Spac issuance was “a direct result” of “increased regulatory scrutiny”, says Therese Poletti for MarketWatch. The IPO process is designed to weed out dodgy claims about a company’s prospects, but the lack of rules for Spacs opens the way to fraud. Still, we probably haven’t seen the end of the frenzy yet. After flotation a Spac usually has a two-year time limit to find a company to merge with. If it fails to do so the vehicle is wound up. There are “more-than 400 already public Spacs searching for targets to find deals”, says Nicholas Jasinski in Barron’s. So there could be a rush of “risky deals” as Spac managers race to beat the deadline, says Poletti. There is a lot of cash ready to fund “pie-in-the-sky technologies [such as] flying robotic taxis”.
A study by the European Corporate Governance Institute found that “Spac share prices tend to fall by about a third of their value within a year of their mergers”, says Foroohar. Another paper found that “fewer than a third of Spacs end up making money for investors”, says Duhigg. Where does the money go? Sponsors, the people who created the Spac, often receive “20% of a Spac’s stock… Such paydays can be worth hundreds of millions of dollars”. As Michael Klausner of Stanford Law School puts it, “The real reason Spacs are so popular right now… is mostly because sponsors are making so much money” from them.
-
8 of the best houses for sale for around £500,000Some of the best houses for sale for around £500,000 – from a 19th-century stone farm cottage in North Yorkshire and a two-bedroom apartment in Edinburgh’s New Town to a converted Methodist chapel in Norfolk
-
What will the unravelling of US-China trade mean for the economy?What will a US-China decoupling mean for the global economy?
-
Two ways to tap into monopoly profits from airportsMost investors can’t get their hands on airports. Here are two ways you can
-
Fat profits: should you invest in weight-loss drugs?The latest weight-loss treatments could transform public health and the world economy. Should you invest?
-
How investors could profit from Ramsden Holdings' four-part growth strategyRamsdens Holdings offers a diversified set of financial and retail services and a juicy yield, says Dr Michael Tubbs
-
How to invest in the booming insurance marketThe insurance sector is experiencing rapid growth after years of stagnation. Smart investors should buy in now, says Rupert Hargreaves
-
Out of America's shadow: Why Trump's tariff chaos may be good for non-US stocksOpinion Upending global investment and trade could benefit other countries at the expense of the US market, says Cris Sholto Heaton
-
BP's 'long, painful decline' – and why next year could be even tougherOpinion Long-suffering shareholders in oil giant BP have been pushing for change. It won’t come soon enough, says Matthew Lynn
-
Investment trusts tap the profits in exotic and obscure global marketsOpinion Peter Walls, manager of the Unicorn Mastertrust fund, highlights three investment trusts as he shares where he'd put his money
-
Falling revenues and mounting debt spell trouble for Jumia TechnologiesStruggling African e-commerce platform Jumia Technologies looks headed for the exit, says Dr Matthew Partridge.
