FOLLOWING a surge in new listings by special purpose acquisition companies (Spacs), one can’t help but worry about how astonishingly short Wall Street’s memory is. These cash shells experienced a spectacular boom and bust from 2020 to 2022 as unrealistic valuations and retail investor enthusiasm for firms with little or no revenue ended in bankruptcies, shareholder litigation and financially painful liquidations. Now, this maligned asset class is off to the races again.
US Spacs have raised US$11 billion so far this year compared with less than US$2 billion in the same period a year earlier, according to data compiled by Bloomberg. They’ll try to find a firm to merge with, providing them with a shortcut to joining the public markets amid a still fairly tepid revival of traditional initial public offerings (IPOs). Spacs have accounted for almost two-thirds of US IPO volume so far this year and more than 40 per cent of proceeds, according to Spac Analytics.
For now, there aren’t as many chasing deals as during the last bull market, and retail investor speculation isn’t as extreme. Furthermore, some longstanding problems – such as publishing outlandish financial forecasts and paying elevated banker fees – show signs of improving.
Yet, Spacs may still have misaligned incentives; insiders can make money even when others don’t, and not finding a deal risks a loss of their capital. Moreover, these investment vehicles are increasingly seeking to merge with crypto companies. What could go wrong?
After giving so-called blank-cheque firms a wide berth due to perceived regulatory risks, bulge bracket banks such as Goldman Sachs Group Inc are tiptoeing back into the market; meanwhile, prolific sponsors like Michael Klein and Alec Gores are putting money to work. Chamath Palihapitiya, a venture capitalist whose roster of Spac deals often ended with retail investors losing their shirts, also appears to want back in, even with tens of thousands of respondents to a self-commissioned poll on X.com begging him to stay out.
Animal spirits have returned
Hedge funds and arbitrageurs are suddenly finding it more difficult to win allocations in Spac IPOs; sponsors are having to put up less risk capital and, in some cases, they’re able to raise so-called Pipe (private investment in public equity) financing to supplement the Spac’s cash (such capital acts as an important external endorsement of the deal value and had all but disappeared during the downturn).
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Why the revival now? Animal spirits have returned; 10 per cent of pre-deal Spacs and 25 per cent of those with announced transactions are trading comfortably above the value of their cash, according to data provider Spac Research.
The political and regulatory environment has also evolved. In the wake of the US Securities and Exchange Commission (SEC) overhauling Spac rules last year to enhance investor protections, sponsors are more wary about publishing multiyear financial forecasts; but on the issue of underwriter liability, the SEC’s review stopped short of delivering a knockout blow. SEC chair and Spac critic Gary Gensler has since been replaced by Paul Atkins, who’s expected to pursue a friendlier approach.
“The signs are the regulatory environment is back to the business of capital formation and that’s helping foster the market,” says Julian Klymochko, chief executive officer of Accelerate Financial Technologies, which has a Spac-focused fund.
Of course, President Donald Trump also has some affinity for blank-cheque firms: His Trump Media & Technology Group Corp, parent of Truth Social, went public last year after merging with Digital World Acquisition Corp.
Now, the president’s son, Donald Trump Jr, is joining the board of online firearms retailer GrabAGun, which is going public via one of anti-woke financier Omeed Malik’s investment vehicles, Colombier Acquisition Corp II. The deal has been well-received, with Colombier’s shares trading at a roughly 35 per cent premium to the value of its cash, valuing the firm at almost US$450 million. GrabAGun’s revenue declined 3 per cent to US$93 million last year.
According to my calculations based on figures in this prospectus, the president’s son is set to receive 300,000 shares currently worth more than US$4 million, while the Colombier sponsor would receive shares and warrants worth around US$76 million (for which it paid a bit more than US$5 million); meanwhile, the owners of GrabAGun will be allowed to cash out US$50 million of the more than US$170 million held by the Spac. Referring to the company as the “Amazon of Guns”, a spokesperson told me media attention from the transaction had drawn new customers to the platform.
In terms of Spac IPO bookrunners, Cantor Fitzgerald LP has led the pack this year, underwriting around a dozen transactions. After Cantor’s former chairman and chief executive officer Howard Lutnick became US Commerce Secretary, the firm is now chaired by Lutnick’s son Brandon, 27, who also heads Cantor-sponsored Spacs.
Targeting speculative sectors
In April, one of those investment vehicles, Cantor Equity Partners Inc, announced a merger with Bitcoin investment vehicle Twenty One Capital Inc; since then, the shares have trebled, valuing the combination at around US$11.5 billion, far more than the Bitcoin it’s set to hold. A similar vehicle, ProCAP BTC, founded by crypto influencer Anthony Pompliano, this week confirmed plans to go public via a different Spac, Columbus Circle Capital Corp I, whose sponsor is a subsidiary of Cohen & Co.
With other Spacs indicating they plan to target crypto or blockchain firms, the sector feels to today’s recovering Spac market what neophyte electric-vehicle manufacturers were during the last boom – a catalyst, but also a potentially risky bet.
Yet, it makes sense that Spac sponsors are targeting speculative sectors – quantum computing, autonomous trucking and the nuclear industry are also popular – because deals must generate investor excitement to discourage hedge funds that seed Spacs with cash from asking for their money back with interest, a process known as redemption.
On average, around 95 per cent of the Spac money was redeemed in deals that have closed so far this year, according to Spac Research data.
Meanwhile, of the roughly 20 companies that have gone public via a Spac this year, I calculate the median has declined around 75 per cent compared with the US$10 IPO price, indicating investors lack confidence this cycle will create more value than the last.
Until this grim track record improves, expect the nascent Spac revival to remain fragile. BLOOMBERG
