SPAC Euphoria Turns Into Painful Reckoning as Liquidity Runs Dry

After losses for backers of special-purpose acquisition companies, one of the hottest trends in investing is back into obscurity.

In the first four months of the year, sponsors of SPACs with some $74 billion in cash will need to find a new home for their funds. This will be the end of a frenzy that saw more than 800 funds raise almost a quarter-trillion dollars over the course of two years. Hundreds of sponsorship teams are expected to throw in the towel through early next year as the euphoria wears off.

During its golden age, the industry attracted legions of retail investors for projects that were tied to celebrities, politicians and athletes, but more often than not turned out to be busts. The mania burned investors who backed companies like Shawn "Jay-Z" Carter and Martha Stewart. The funds are likely to return to being a niche product.

According to Matt Maley, the chief market strategist at Miller Tabak & Co., they were never going to make it. There was too much money in the system. There are a lot of companies that are only trying to make money for themselves.

SPACs raise money in initial public offerings in order to buy businesses that will be identified later on. The industry took Wall Street and retail traders by storm in the early part of the epidemic when easy money and a lack of supervision caused investors to flock to riskier assets.

This year was different. Data from SPAC Research shows that nearly 100 firms successfully completed SPAC mergers in the last two years. Their performance has not been good. The S&P 500 has lost 4% of its value, but the median post-merger company has lost 70% of its value.

More than a third of the companies that have gone public via SPAC trade below $2, far from the $10 level at which they typically go public. Blowups will only continue with companies going bankrupt, opting to get taken out by competitors at fire sale prices, or going private again, if the performance of the company is not good.

Taylor Sherman said that many of the poorly performing de-SPACs may run out of cash in the next year. He warned that the electric-vehicle and biopharmaceutical industries may run out of money.

There were fortunes to be made for those who timed their trades perfectly. In the weeks after the deal was announced, the SPAC increased in size. Opendoor Technologies went public in February of last year.

Since then both stocks have crashed.

In the two days after the deal was announced, Digital World Acquisition Corp. soared 1,650% to $175 a share. The closing price was $21.43 on Wednesday.

The collapse is being driven by proposals to crack down on the industry from the US Securities and Exchange Commission and traders bailing on speculative bets. This year, 58 deals have been called off. The majority of investors who have identified companies to acquire have opted to redeem their shares and get their cash back in order to protect them if they don't like the target.

SPACs collapse as Gores joins the list.

Sagging markets have led to the shutting down of many blank-check companies by serial sponsors like Alec Gores and Bill Foley. Gores, one of the most well-known backers of the vehicle, warned last month that the industry faces a needed reset.

Increased interest rates and a less-than-stellar outlook for the stock market will likely cause more issues for companies created in the SPAC mania. More than 85% of de-SPACs don't have enough money on their balance sheet to make it through the rest of the decade, according to data compiled by the company.

After the dust has settled, investors agree that the vehicles should be returned to a niche product led by experienced and dedicated sponsors with a focus on smaller targets. The industry may look a lot like the 59 blank checks that came out in 2019.

There will be a smaller number of SPACs going forward. You will see a more refined group of sponsors when youTrademarkiaTrademarkiaTrademarkiaTrademarkiaTrademarkia.Trademarkia.Trademarkia.Trademarkia.Trademarkia.Trademarkia.Trademarkia.Trademarkia.Trademarkia.Trademarkia.Trademarkia.Trademarkia.Trademarkia.Trademarkia.Trademarkia.Trademarkia.Trademarkia.Trademarkia.Trademarkia.Trademarkia.Trademarkia.Trademarkia