In terms of funds raised, SPACs launched in the first 90 days of 2021 surpassed the total aggregate raised for all of 2020. This past week another 21 SPACs IPO’d. As of this writing, the first-day return for SPACs has steadily retreated from 6.1% in January to near 0% for March. And yet, the SPAC parade marches on.
The markets were volatile this week. The S&P 500 finished the week up 1.18% with a high/low differential of 111.93 points. The NASDAQ finished the week down 1.37% with a high/low differential of 629.38 points. The choppy trading in the indices was a byproduct of multiple cross-currents: a strengthening dollar, “Big Tech”, like Twitter and Facebook, testifying before Congress, and a voluble Fed that can’t seem to get itself out of the headlines. And yet the SPAC parade marches on.
For some, myself included, the continuous roll-out of new SPACs is becoming a bit of a head-scratcher. This week’s market volatility did nothing to dispel the notion that we’re at the peak of a boom/bust cycle. The volatility supports the theory that investor psychology is shifting towards (net) risk-off behavior. But the bulge- bracket investment banks keep raising money for SPACs. Do they know something that we don’t, or is the primary driver of SPAC formation simply investor capital availing itself of market timing?
The answer is a bit of both. That capital seeks the most efficient pathway to risk-adjusted returns is axiomatic. That will never change. And surely the current environment is conducive to large capital flows being directed towards to the largest Wall Street investment banks for allocation. However, it would be folly to look at the bulge brackets’ continuous SPAC funding as if they have exclusive insights about the future of the market that the rest of us don’t. The better explanation is that the large investment banks are driving the SPAC parade for nothing more than profit.
Large investment banks aren’t advocates looking out for the best interests of their clients. They’re for-profit centers that make money on effectuating transactions. It’s all about the fees. It’s not about the long-term viability of the SPAC sponsor or the target company.
To emphasize this point, look no further than one of Wall Street’s most storied investors, and loveable curmudgeon, Charlie Munger. The 97-year-old, longtime partner of Warren Buffet, and Vice-Chairman of Berkshire Hathaway, nailed it (in my opinion) in an interview at the Daily Journal’s annual shareholder meeting on February 24th. When asked about the recent proliferation of SPACs, Charlie, as he is wont to do, spoke colorfully about the trend and the investment banks that continue to roll them out: “The world would be better off without [SPACs]. This kind of crazy speculation in enterprises not even found or picked out yet is a sign of an irritating bubble. It’s just that the investment banking profession will sell shit as long as shit can be sold.”
I agree with Charlie – for the most part. The SPAC parade is largely driven by speculative trading and bulge-bracket profits, and like most trends of its ilk, it will not end positively for many of the target companies and shareholders. The flip side is that quite a few private companies that chose the SPAC route to go public have necessarily made the right decision. Of particular note are many of the SPAC sponsors who targeted fintechs. Although it’s still too early to determine objective winners and losers of the recent fintech SPAC class, take a look at the chart below and see if you can discern for yourself. I think fintech, overall, has fared pretty well in the SPAC parade.
– Adam T. Hark, Managing Director, Wellesley Hills Financial, LLC