New year – and on Wall Street, perhaps the same bubble forming.
No, not GameStop.
You’d be forgiven if the tug of war between hedge funds and retail investors – and the soaring and swooning over GameStop and Dogecoin – would be top of mind in anticipation of a bubble taking shape that will, at some point, see either deflation or a pop.
Perhaps also turn your gaze to special purpose acquisition companies, more commonly known as SPACs.
So far this year, according to SPACInsider.com, there have been 91 SPAC IPOs, which indicates a torrid January, for gross proceeds of $25.4 billion. Compare that to the fact that in 2020, there were 248 such transactions, with proceeds of $83 billion.
As has been widely noted, the SPAC exists as a shell company that exists only to raise money via an IPO – and that money is then used to acquire another firm, which goes public in the merger.
A number of verticals are seeing such activity – spanning sports betting (DraftKings) and Virgin Galactic, to name just two. Upcoming SPACs, as noted by CNBC, may include 23andMe, which is focused on DNA testing, and a slew of media companies, including BuzzFeed. Add Simon Property Group to the list – the real estate investment trust formed a blank check firm known as Simon Property Group Acquisition in an IPO slated to raise up to $300 million. And Wheels Up, which offers a tech-driven marketplace for private air travel, has announced its plans to go public via a SPAC merger with Aspirational Consumer Lifestyle Corp. Late last year, PYMNTS noted that the payments space has been fertile ground for SPACs.
And now come the day traders, in a wave that may wind up being reminiscent of the wild volatility that has marked trading in GameStop as of late.
The Wall Street Journal reports that day traders are turning their attention to SPACs, and have been pushing those IPOs to outsized gains right out of the gate. Thus far, the Journal said, citing University of Florida Professor Jay Ritter, SPACs have logged 6 percent gains on the first day of trading so far this year, which outpaces the 1.6 percent average gain logged in trading debuts last year.
The last 140 SPACs to go public have either logged gains or ended flat on their opening day of trading, reported the Journal.
SPAC Enthusiasm Crosses Borders
And the enthusiasm is crossing borders, becoming global in scope for the individuals and firms that actually do the deal-making behind, and creation of, SPACs. Bloomberg reported that a number of funds and financiers are pushing into the SPAC space.
“Asia is the next big treasure trove for SPAC candidates,” said Joaquin Rodriguez Torres, co-founder of investment fund Princeville Capital, who has launched SPAC Poema Global Holdings LLC. “Funds that have expertise in both companies operating in Asia and how U.S. capital markets work hold a significant advantage.” Bloomberg noted that currently, the global market is dominated by US SPACs at 85 percent of the market, and Asia is about 5 percent.
We note that the enthusiasm – especially from day traders and smaller retail investors – is pouring into SPACs, where one of the defining characteristics is a lack of operating history. Grabbing onto the IPO before mergers have been announced means, essentially, trusting the sponsor, whether it’s an institution (such as Simon Property) or a marquee name like Richard Branson. There are no financials to parse, and no multiples to assign in a bid to value … an eventuality that at the time of the IPO is nebulous.
In other words, SPACs are popular because SPACs are popular, and it may not be too far-fetched to say “fear of missing out” (you know, FOMO) is now an investment philosophy (okay, a speculation philosophy).
All of which leads us to wonder if 2021 will go down as the year of “SPAC-ulation” – and how it will all play out.