- The use of blank check companies, or SPACs, to take companies public has surged.
- The sudden fad has investors asking: what happens when this bubble pops?
- Commentary Editor Bob Bryan (virtually) sat down with Insider columnists Linette Lopez and Josh Barro discuss the wild SPAC boom, how it relates to the Tesla and the crypto craze, and how it ends.
- This is an opinion column. The thoughts expressed are those of the author.
- See more stories on Insider’s business page.
Special-purpose acquisition companies, or SPACs, are booming. The investment vehicle allows private companies to go public without going through the usual IPO process.
Basically, a pool of investors gets their money together and takes a shell company public, then uses that pile of cash and buy a private company. The private company is now listed on the stock market and the investors own a big stake in the firm.
The move used to be rare, but nowadays SPACs are all the rage. Silicon Valley VCs, celebrities, and former politicians are all getting in on the craze.
But as with every boom, there is one big question looming over the SPAC mania: what happens when this all goes bust?
In an attempt to answer this foreboding question, I chatted with Insider columnists Josh Barro and Linette Lopez on Thursday and asked them about the SPAC boom, how it relates to other “glamour assets” like NFTs and Tesla stock, and how it’s all going to end. — Bob Bryan
It seems like the “SPAC boom” came out of nowhere despite these products existing for decades, why did this sudden surge happen now? And it seems to be coming at the same time as other frenzies like the crypto craze or meme stock mania, are these wild rides interrelated?
Josh Barro: My sense is they are closely related and that’s a factor behind the SPAC boom. The froth in the market and enthusiasm for new, more growth-oriented asset types has created an environment where it’s easier for SPACs to trade above their offering price which in turn makes it more attractive to launch a SPAC. In the long run, that won’t be sustainable. Eventually, you’d expect a return to pre-fad levels of SPAC activity driven by the actual availability of attractive acquisition targets rather than investor desire to be in SPACs.
Linette Lopez: The first big SPACs also have been launched by the poster boys for this kind of growth moment — the Silicon Valley stars, etc. Right now there’s a demand for what these SPAC creators are selling and so they’re just meeting the demand as best they can. Silicon Valley’s like, you want growth assets? I’ll show you growth assets. If something works once or twice, Wall Street will do it 1,000 times. Beat it to death. That’s what we’re seeing now.
Is there anything unique to the SPAC model that is drawing people’s attention?
Josh: I’m not sure this counts as “unique” but I think there are a few features of SPACs that make them appealing to retail investors right now. They give the appearance of access to an asset class that retail investors usually can’t access: private firms. They give the appearance of entry into an IPO, which is usually more exclusive. And they often have famous names attached to them, either Silicon Valley figures or literal celebrities. So while the vehicle type is (formerly) obscure, it hits on several trends that are definitely not obscure.
Linette: With the market as frothy as it is people need new stuff. The IPO process creates barriers to entry that the SPAC process removes. And with the market being frothy, investors don’t care. What they care about is who else is involved — the club — this is why Chamath and Richard Branson starting this whole thing off is important. That got everyone talking about these things. And for Wall Street, it was an easy way to raise a load of money for big brand names, like Bill Ackman, for example. Dan Loeb also has a SPAC. Everyone has a SPAC. Because if there’s free money why not?
So it’s almost like a new nightclub: private, exclusive, big names attached?
Josh: I don’t think it’s especially different from the broader trend of people being drawn to companies that are glamorous and trendy, like Tesla and Apple. Investors see something glamorous and want to be a part of it.
Linette: All bubbles are FOMO driven. Stupid, glamorous, greedy whatever… It’s not just wanting be apart, it’s being afraid to miss.
Josh: Space travel is glamorous, electric luxury cars are glamorous. There have been hot companies that take something mundane and make it seem glamorous — WeWork tried (and succeeded for a time) to make shared office space a glamour business. Claims that cryptocurrency is not just a speculative product or a way to buy drugs but a tool to radically democratize the world financial system make it seem glamorous. This all disconnects asset prices from being a discounted present value of future profits. These investments are about buying into an idea and being a part of something big and important. This was the story with GameStop too — this isn’t just an asset bubble, and it isn’t just a strategy to pivot a brick and mortar retailer to online or a way to “take on the evil hedge funds”
Linette: And hedge funds know what drives this… big names. So you can recruit a guy like Colin Kaepernick who has no Wall Street cred, but he’s a name. There are tons of companies that could use the money and will do productive things with them, but the SPAC process isn’t the best way to evaluate that. We know that already.
Josh: I think as people start getting more opportunities over the next few months to go to parties and travel and engage in real-life adventures, that may take some of the air out of the use of investing for vicarious adventure, including but not limited to the SPAC fad.
A lot of the big SPACs are connected to Silicon Valley and then you have Wall Street firms doing the plumbing. What does this seemingly mutually beneficial boom tell you about the way these two institutions interact and see each other now?
Linette: I can’t say it better than Charlie Munger did “Wall Street will sell s— as long as s— will be sold.”
Josh: Silicon Valley firms have long had relationships with Wall Street about raising capital. So the demand for SPACs creates additional reasons for them to work together and changes how they do it.
Linette: Silicon Valley is a veritable mine field of companies without real prospects, but just loaded with shareholders looking for an exit — SPACs are perfect for that. The Silicon Valley-Wall Street relationship, though, can be fraught. And that is because Silicon Valley only makes money on the way up, for the most part. Thus its obsessions with hating short sellers.
Wall Street can make money on the way up and down. It can make money selling your shares, marketing, and then it can turn around and short you. So when the wind changes, Silicon Valleys thinks “hey, these guys are screwing us!” But actually, a lot of Wall Street smiles along, taking fees and waiting to turn around and take the other side of the bet the whole time.
Josh: I do think it’s kind of odd how this has progressed because you had this trend of companies staying private longer and longer because the private capital was so cheap and I think that made a lot of people in Silicon Valley sort of entitled about shorts. The private market doesn’t have shorts, and they were awash in private capital, so why should they have to deal with these obnoxious shorts. But then the private market got a little less frothy and SPACs mark a pivot back to public capital
Linette: Yeah the the Silicon Valley guys are like WHO ARE THESE PEOPLE. GET ‘EM OUTTA HERE.
Josh: Right now the mood is very positive in the public market, and of course some of the GME shorts got very publicly burned but eventually that mood will change again and I assume that some of the firms that got taken public via SPAC will become beleaguered and they’ll be miserable about the shorts again.
How does this all end? Could it have economy wide effects?
Josh: I’m not really worried about systemic economic risks here. I don’t think the investments are large enough and levered enough to cause systemic problems.
Linette: Me either
Josh: This isn’t the housing bubble, people will be left holding some bags but it won’t make them homeless. Of course it’s not just SPACs, it’s not even principally SPACs. At least the SPAC has a pool of money it’s holding at the end of the day — it shouldn’t be worth $0.
Linette: This is just going to be silly. And I think a lot of the companies that go to market are going to be exposed in ways they were not prepared for. We already saw that with Clover Health, the Chamath backed company that merged with a SPAC. Almost instantly we found out the Feds were investigating it for potential Medicare fraud. We’ll find out that companies balance sheets aren’t all that healthy (to say the least), that management is out to lunch… all sorts of things that should’ve been teased out during an IPO process will not become a part of price discovery in the stock market. Obviously that adds volatility in the market.
Josh: Yeah but again that’s fine — price adjustments like that will cause some people to lose money but I wouldn’t expect big knock-on effects. I think we’re going to see this across a wide variety of glamour assets though valuations sooner or later have to be linked to future profitability.
So the blow ups will be louder but it’ll be confined to the the people invested in those SPACs?
Linette: Right, but because of the very nature of these SPACS they will be attached to buzzy names etc. It’s going to be more embarrassing than anything else.
Josh: These SPACs aren’t worth nothing. before they identify a company, they have cash. Maybe they overpay for the company, but it’s likely still worth something. Frankly I consider crypto to be a bigger concern.
Linette: I know we have to include NFTs in this “glamour” thing but they are the lamest, least sexy thing I have ever seen Wall Street do and everyone should be ashamed. But that’s another story.
Josh: Right. Crypto and NFTs have no fundamental value. There’s no way to model what their price “ought” to be and therefore no way to rely on future market demand for them.
Linette: Agreed, in that sense at least the SPACs are… something. Some might be scams, but most are something.
In every bubble, even when they go bust, someone comes out a winner. Who ends up “winning” the SPAC bubble?
Josh: The people who collect the fees on the SPACs. I mean and of course there will be other winners and losers — some companies that get taken public by SPAC will outperform expectations and investors in them will make money.
Linette: The fee collectors always win.
Do you think even for SPACs with underlying companies who are performing well there’s going to be a price reckoning coming?
Josh: There are two reasons a SPAC would be overvalued. One is that, as Linette says, people failed to understand risks and pitfalls associated with the business. The other is if valuations are simply too high across the whole space. So even if the company performs as expected, the price should still fall. In that environment, there will be variation, and some should go up, but on average they should go down. It’s like how if you hit on eighteen at blackjack, you might win — but you probably won’t.
By the time the burst comes, you don’t hold the SPAC, you hold the company the SPAC bought and I think it would apply to other assets that were similarly flashy too, including some non-SPAC equities.
Linette: Unclear if the market will still be judging the company as a SPAC by then or just a company that doesn’t have the goods or just a tech company, or healthcare company, or whatever sector it’s in
Josh: Well that’s why I think it makes sense to think of it as a broader glamour asset issue. I mean, if you hold the SPAC that’s going to take Virgin Galactic public, and then you hold Virgin Galactic itself, we’re talking about the same froth applying to both, right?
Should we get used to SPACs as a part of markets? are we just going to see a permanent increase in the number of companies going public via SPAC or is there an end to that trend too?
Josh: I don’t think there’s anything inherently wrong with using a SPAC as a way to go public, and taking private companies public is a normal part of a business’s life cycle. I don’t know whether the level ought to be permanently higher than it was a few years ago
Linette: I think SPACs are a sign of wanting to move at a speed that leaves price discovery for the last bit. And we’ll find that investors are reminded that that order of operations is not good for them. Luckily investors are like goldfish, they forget fast, which is why we’re here in the first place. There will be another SPAC boom, I’m sure, when the demand for assets gets this high again and people want something FAST.
One last question, what would the name of your SPAC be?
Josh: Oh god, naming things is so hard. I guess Mayonnaise SPAC because everyone likes mayonnaise
Linette: Eat the Rich ESG SPAC, because that’s what sells right now
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