Matt Levine is a Bloomberg Opinion columnist covering finance. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz, and a clerk for the U.S. Court of Appeals for the 3rd Circuit. @matt_levine SPAC SPAC SPAC
A common enough structural feature in financial markets is:
> There is a thing.
Smart wealthy well-connected insiders discover the thing and buy it.
The price goes up.
Normal retail investors discover the thing and buy it.
The smart wealthy well-connected insiders sell the thing at high prices to the retail investors.
Then the price goes down.
I don’t think that this is the general mechanism of financial markets or anything — I don’t think that, like, “the smart money” is off buying one asset class while the rubes are buying something else — but it is definitely a mechanism. For instance this could roughly describe much of venture capital, where VCs put money into startups at low valuations, and then those startups take off and go public at higher valuations. Or it describes some of crypto, where VCs make billions selling, for instance, Luna tokens to retail just before they crash.
One amusing thing about the special-purpose acquisition company boom is that it kind of went the opposite way? The way a SPAC works is that a sponsor — generally a well-connected successful financier or businessperson — raises a pot of money from public investors and then goes and looks for a private company to take public using the pot of money. If she succeeds, the public investors end up owning the target company, and the sponsor gets a huge chunk of shares almost for free. If she fails, the public investors get their money back with a tiny amount of interest, and the sponsor is out of pocket for the costs (underwriting fees, lawyers, etc.) of doing the SPAC. Those costs are trivial in comparison to the huge chunk of shares she will get for free in a successful deal — but they are not trivial in comparison with nothing .
There was a huge boom in SPACs in 2020 and early 2021. Many retail investors piled into SPACs. And because of the demand for SPACs, many sponsors piled into raising SPACs. They saw other sponsors getting rich by raising SPACs and finding targets, so they wanted in. And now there are a lot of SPACs chasing not many deals, and proposed Securities and Exchange Commission rules mean that it will be harder for those SPACs to do any deals. SPACs are time-limited — generally they have to return their money after two years if they don’t do a deal — and a bunch of them are coming up on their expiration dates with no deals.
Plenty of retail investors probably got burned buying SPACs, paying huge prices for shares in SPACs that took speculative companies public, only to see the shares drop when the companies didn’t perform. But the retail investors who piled in at the tail end of the boom just … sort of paid $10 for shares of SPACs that never did anything and will return their $10 with interest? Meanwhile the sponsors who piled in at the tail end are holding the bag : An investor stampede out of risky trades is squeezing SPACs that are running out of time to find companies to take public, potentially leaving their architects without deals and saddled with sizable losses. …
A unique element of the SPAC market is that shell companies’ creators typically have two years to find a company to take public, otherwise they must return money to investors and forfeit the $5 million to $10 million on average that they pay to set up the blank-check firms through lawyers and auditors and evaluate mergers.
Because so many SPACs raised money during the frenzy early last year, roughly 280 face deadlines in the first quarter of 2023, figures from data provider SPAC Research show. If the current pace of SPAC deal making continues, analysts estimate that a large percentage of those blank-check firms won’t find mergers. The merger window for many SPACs is closing because it often takes months to find a deal and many companies that previously might have considered such mergers are now electing to stay private, bankers say.
Creators of those SPACs and other insiders together are now expected by early next year to lose $1 billion or more—money known as “at-risk capital” that they have already […]
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