Companies that went public through special purpose acquisition companies (SPACs) have seen their value decrease by approximately $75 billion after a broad selloff, according to a Dow Jones Market Data analysis, The Wall Street Journal reports. A group of 137 SPACs that finalized mergers by mid-February have lost 25% of their combined value. The fall off actually exceeded $100 billion at one point in August.
Meanwhile, an exchange-traded fund that monitors businesses that recently went public through initial public offerings (IPOs) fell 12%. The Down Jones Industrial Average increased 13%.
Companies connected to green energy and sustainability saw some of the biggest declines among businesses formed via SPACs, but they are not alone, The Wall Street Journal reports. Approximately three-quarters of SPACs that announced deals but have not finalized them are trading below their listing price. Earlier this year, SPACs almost always went up after they announced a deal, but it’s becoming more common to see shares fall after such announcements.
Firms like BlackRock and Fidelity Investments are feeling the impact of the SPAC selloffs. The same goes for a lot of hedge funds, pension managers and anyone else who put money into SPACs when they become popular near the end of 2020. On a positive note, a lot of funds “bought low”, so they’re still enjoying substantial gains. The SPAC sector currently sits at $250 billion—a $150 billion increase from a year ago.
Investors late to the SPAC game have not been as fortunate, however.
“I don’t tell my wife about many of the red days,” Alex Vogt, a 30-year-old physician assistant in Grand Rapids, Mich., who has most of his portfolio tied to electric car companies that merged with SPACs Like Lucid Group and ChargePoint Holdings Inc. told The Wall Street Journal. His portfolio went above $1 million earlier this year, then dropped to about $600,000 in August.
Appeal of the SPAC
SPACs raise money and trade on a stock exchange for one purpose—to merge with a private company and take it public. Private enterprises are attracted to this setup because it’s a faster way to become a publicly traded company than through the traditional IPO. SPAC deals also let the company going public to make business projections, which it couldn’t do in an IPO. After a failed IPO attempt, coworking space provider WeWork found a path to going public through a SPAC.
Meanwhile commercial real estate firms like Silverstein Properties, property technology companies such as Latch and 5G hardware and software providers Airspan Networks have leveraged the SPAC craze to have their businesses go public. Whether or not the decision to do so remains to be seen, as some investors believe this summer’s about face was an inevitable return to earth, The Wall Street Journal reports. A lot of businesses that have merged with SPACs don’t have much revenue, but have billion dollar valuations.
“Air has come out of the bubble,” Roy Behren, managing member at Westchester Capital Management and a SPAC investor told The Wall Street Journal. “That’s the cost of speculating in companies that have potentially bright but uncertain futures.”
With more cases of startups misleading investors in SPAC deals and disappointing financial results from a lot of companies, creation of these “blank check” firms have slowed, leading to share price declines. Regulators’ recent increase in their scrutiny of the SPAC sector has also led to a drop in enthusiasm.
Additionally, SPACs are vulnerable to share price drops because investors can pull their money out of the blank check company prior to the merger being completed. This happens often when SPACs trade below their listing price. More than 95% of the SPACs that haven’t announced deals are trading below their listing price, according to The Wall Street Journal. If a large investor pulls their funds, the company planning to go public is suddenly without a lot of cash, which makes it more difficult to meet targets and can potentially lead to a bigger stock price drop.
“I knew I was looking for high volatility when I got into this,” Keith Williams-Parker, who has the majority of his roughly $85,000 portfolio in companies that merged with SPACs said. “I am still swinging for the fences.”
Joe Dyton can be reached at firstname.lastname@example.org