- July 29, 2022
- Posted by: Ramkumar
- Category: Posts
Structural Issues With SPAC
The 𝐒𝐏𝐀𝐂: 𝐒𝐩𝐞𝐜𝐢𝐚𝐥 𝐏𝐮𝐫𝐩𝐨𝐬𝐞 𝐀𝐜𝐪𝐮𝐢𝐬𝐢𝐭𝐢𝐨𝐧 𝐂𝐨𝐦𝐩𝐚𝐧𝐢𝐞𝐬 that had raised millions of dollars last year and gained massive popularity as an alternative to banker-led IPOs to generate superior investor returns performed miserably previous quarter. The 𝐈𝐏𝐎𝐗 𝐒𝐏𝐀𝐂 𝐢𝐧𝐝𝐞𝐱 𝐟𝐞𝐥𝐥 𝐛𝐲 𝐦𝐨𝐫𝐞 𝐭𝐡𝐚𝐧 𝟏𝟎% 𝐚𝐧𝐝 𝐢𝐧𝐯𝐞𝐬𝐭𝐨𝐫 𝐫𝐞𝐭𝐮𝐫𝐧𝐬 𝐟𝐨𝐫 𝐒𝐏𝐀𝐂 𝐭𝐡𝐚𝐭 𝐜𝐨𝐦𝐩𝐥𝐞𝐭𝐞𝐝 𝐚 𝐦𝐞𝐫𝐠𝐞𝐫 𝐫𝐞𝐭𝐮𝐫𝐧𝐞𝐝 -𝟐𝟕%, with investors dumping SPAC-issued warrants.
Though 𝐈 𝐚𝐦 𝐧𝐞𝐯𝐞𝐫 𝐚 𝐟𝐚𝐧 𝐨𝐟 𝐭𝐡𝐞 𝐛𝐚𝐧𝐤𝐞𝐫-𝐥𝐞𝐝 𝐈𝐏𝐎 𝐦𝐨𝐝𝐞𝐥, which is tedious, expensive, and inefficient, 𝐈 𝐧𝐞𝐯𝐞𝐫 𝐛𝐞𝐥𝐢𝐞𝐯𝐞𝐝 𝐒𝐏𝐀𝐂 𝐜𝐨𝐮𝐥𝐝 𝐫𝐞𝐩𝐥𝐚𝐜𝐞 𝐭𝐡𝐞 𝐭𝐫𝐚𝐝𝐢𝐭𝐢𝐨𝐧𝐚𝐥 𝐛𝐚𝐧𝐤𝐞𝐫-𝐥𝐞𝐝 𝐈𝐏𝐎𝐬.
One of the reasons why #spac became prominent last year was due to the following:
1)𝐋𝐨𝐰-𝐢𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐫𝐚𝐭𝐞𝐬 – Investors were ready to invest in SPAC compared to bonds giving nearly zero returns.
2)𝐇𝐢𝐠𝐡 𝐒𝐭𝐨𝐜𝐤 𝐩𝐫𝐢𝐜𝐞 – 𝐞𝐬𝐩𝐞𝐜𝐢𝐚𝐥𝐥𝐲 𝐟𝐨𝐫 𝐠𝐫𝐨𝐰𝐢𝐧𝐠 𝐭𝐞𝐜𝐡 𝐜𝐨𝐦𝐩𝐚𝐧𝐢𝐞𝐬
SPAC was never a valuation game, but pricing that drives mood and momentum.
3)𝐒𝐨𝐜𝐢𝐚𝐥 𝐌𝐞𝐝𝐢𝐚: Celebrities with massive social media followings invested in SPAC, triggering the average public to invest their money.
𝐈𝐧 𝐦𝐲 𝐯𝐢𝐞𝐰, 𝐭𝐡𝐞 𝐒𝐏𝐀𝐂 𝐩𝐫𝐨𝐜𝐞𝐬𝐬 𝐡𝐚𝐬 𝐬𝐭𝐫𝐮𝐜𝐭𝐮𝐫𝐚𝐥 𝐢𝐬𝐬𝐮𝐞𝐬 𝐭𝐡𝐚𝐭 𝐧𝐞𝐞𝐝 𝐟𝐢𝐱𝐢𝐧𝐠.
𝐓𝐡𝐞 𝐒𝐏𝐀𝐂 𝐬𝐩𝐨𝐧𝐬𝐨𝐫 𝐭𝐚𝐤𝐞𝐬 𝟏𝟓-𝟐𝟎% 𝐨𝐟 𝐭𝐡𝐞 𝐩𝐫𝐨𝐜𝐞𝐞𝐝𝐬 𝐚𝐧𝐝 𝐮𝐧𝐝𝐞𝐫𝐰𝐫𝐢𝐭𝐢𝐧𝐠 𝐟𝐞𝐞𝐬. Thus, the 𝐒𝐏𝐀𝐂 𝐬𝐩𝐨𝐧𝐬𝐨𝐫𝐬 𝐚𝐫𝐞 𝐭𝐡𝐞 𝐜𝐥𝐞𝐚𝐫 𝐰𝐢𝐧𝐧𝐞𝐫𝐬 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐩𝐫𝐨𝐜𝐞𝐬𝐬 𝐚𝐭 𝐭𝐡𝐞 𝐞𝐱𝐩𝐞𝐧𝐬𝐞 𝐨𝐟 𝐢𝐧𝐯𝐞𝐬𝐭𝐨𝐫𝐬. At worst, sponsors return the cash to their investors if the deal does not consummate. When they close the deal, they get a multiple of the original investment as a reward for discovering a target and negotiating the price.
Though there are exceptions like DraftKings Inc. and Virgin Galactic IPO, which delivered more than 300% returns, we need to examine SPAC investor returns in two periods. 𝐎𝐧𝐞 𝐟𝐫𝐨𝐦 𝐭𝐡𝐞 𝐭𝐢𝐦𝐞 𝐚 𝐒𝐏𝐀𝐂 𝐢𝐬 𝐭𝐚𝐤𝐞𝐧 𝐩𝐮𝐛𝐥𝐢𝐜 𝐭𝐨 𝐰𝐡𝐞𝐧 𝐢𝐭 𝐚𝐧𝐧𝐨𝐮𝐧𝐜𝐞𝐬 𝐚 𝐦𝐞𝐫𝐠𝐞𝐫 𝐝𝐞𝐚𝐥, 𝐚𝐧𝐝 𝐨𝐧𝐞 𝐟𝐫𝐨𝐦 𝐭𝐡𝐞 𝐰𝐞𝐞𝐤𝐬 𝐚𝐟𝐭𝐞𝐫 𝐭𝐡𝐞 𝐦𝐞𝐫𝐠𝐞𝐫 𝐝𝐞𝐚𝐥. In my analysis, the SPAC process gives negative returns with investors losing money.
The SPAC process favour sponsors with a massive subsidy and deal fees. I still cannot fathom why the deal fees on the SPAC deal are 5-6%, mainly if the sponsors get rewarded for finding the right target and negotiating the best price. So who are the beneficiaries, and what are the services they deliver in return?
In my view, If the 𝐝𝐢𝐫𝐞𝐜𝐭 𝐥𝐢𝐬𝐭𝐢𝐧𝐠 𝐩𝐫𝐨𝐜𝐞𝐬𝐬 𝐛𝐞𝐜𝐨𝐦𝐞𝐬 𝐟𝐚𝐯𝐨𝐫𝐚𝐛𝐥𝐞, it is a better candidate to replace the inefficient banker-led IPO model than the new-age SPAC process, which is discriminatory against the investors.