SPACs, the blank check companies that are used to go public in the US quickly, have raised $8.7 billion since last April, a figure that is double that of all of 2023. This investment vehicle It had its golden years in the middle of the pandemic, when the financial markets, starting with bitcoin, began to boil.
SPACs are returning strongly to the market and that means one thing: there is fresh money available that seeks high profitability and in the shortest possible time. The last time the market entered a euphoric phase was after covid. After the plummet of global stock markets due to lockdowns, the US stock market recovered brilliantly with a spectacular rebound that lasted until 2022.
As on that occasion, bitcoin is being one of the hottest assets and the Nasdaq is unable to beat maximum after maximum. A couple of years ago there was no banana with duct tape, in the form of a work of art, for which a million was paid, but, instead, it was purchased for thousands and thousands of dollars NFT, a derivative of cryptocurrencies associated to art.
SPACs were also a phenomenon of that bubble era. These companies were created in the 1980s, when small companies were looking for ways to enter the market by avoiding the usual IPO procedure. Historically, these types of companies were involved in speculative investments with penny stocks companies, that is, risky securities that operate below the dollar and normally have micro-capitalization. In the end, these are operations that remained in the blind spots of the SEC’s radar and often ended in fraud for investors..
Two years ago they gained speed as it was a simple and quick way to go public, without going through the scrutiny of the regulator. Since April they have returned to the scene with 50 new SPACs. Howard Lutnick, CEO of Cantor Fitzgerald LP and Donald Trump’s nominee for commerce secretary, raised a $100 million blank check in August and then, days before the election, filed for what would be a tenth SPAC; Michael Klein raised $287.5 million in May; and Harry Sloan and Eli Baker’s Eagle Equity Partners debuted its ninth SPAC in late October.
Losses of more than 90%
The operations that these entities promoted, more than two years ago, have ended up collapsing by more than 90%. It is still surprising within the sector itself that many of them have been the largest operations. “It’s surprising to see that the SPAC market has endured at the rate it has”says Jennifer Cheng, global president of mergers and acquisitions at Reed Smith with experience leading business combinations with SPACs, to Bloomberg. “You would think that the poor performance of many of these public companies after the business combination would be enough to serve as a warning.”
Nearly half of the more than 450 former SPACs still publicly traded have lost more than 90% of their value since they debuted, SPAC Research data analyzed by Bloomberg shows. That’s in addition to dozens that went bankrupt or were bought at fire-sale prices shortly after debuting on public exchanges.
The fallout has led to lawsuits from regulators and retail investors who blame SPAC sponsors for misleading buyers about their structure and having early contact with potential targets. Last week, Cantor Fitzgerald agreed to pay $6.75 million to resolve allegations from the U.S. Securities and Exchange Commission. (SEC) that it misled investors in two blank check companies before their stock market debut.
Howard Lutnick was the head of six SPACs that completed deals since the onset of Covid-19, and only one company, GCM Grosvenor, provided investors with a long-term return. Similarly, Klein, a former Citigroup banker, has only one winner in Oklo, a developer of advanced nuclear systems backed by Sam Altman. Two of Klein’s five completed deals are trading for the equivalent of pennies.
Even the team at Eagle Equity, which took DraftKings public in April 2020 and helped spark blank-check mania, has had “failures,” says Julian Klymochko, CEO of Accelerate Financial Technologies, who said he likes the team and owns its most recent SPAC, Bold Eagle Acquisition. The firm’s biggest losers are Ginkgo Bioworks Holdings and Skillz, which have plummeted more than 98% each.
However, the lackluster track record doesn’t stop investors from looking for the big play in SPACs. And hopes that the current market frenzy could fuel the SPAC scene for more than just a hot spot for quick profits has caught the attention of others.
And in practice, investing in SPACs is a disaster. The average loss of the last twelve debutants on the stock market in this way exceeds 60% losses.
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