• 23
  • 13
  • Favorite

The Great SPAC Debate: Are They In A Bubble?

Benzinga2021-02-16

The soaring valuations handed out to newly public companies in the initial public offering boom has led some to believe there's an IPO bubble. One part of this potential bubble is the rise in special purpose acquisition companies or SPACs.

More than half of the IPOs in 2020 were done through SPACs, which are blank check companies created to merge with another firm, taking it public in the process. So is the current market sustainable, or is there indeed a bubble that will pop at some point?

Many hedge funds have written about the SPAC tend in their recent letters to investors, but most of them are bullish. Sabrepoint has taken a contrarian view, as portfolio manager George Baxter believes there is a bubble. He said in the fund's fourth-quarter letter that they're finding many short opportunities in SPACs.

Baxter noted that many of the SPACs that held IPOs in 2020 are subject to lockups that will expire at an accelerating rate starting next month. He believes this sudden supply of shares will overwhelm investor enthusiasm for SPACs, creating what he considers to be "one of the best opportunities on the short side since our inception."

In a recent report, Goldman Sachs analyst Allison Nathan and her team weighed the issues surrounding SPACs and considered whether they are indeed in bubble territory. They looked at whether the entire IPO market is in a bubble and whether just the SPAC part of the IPO market is in a bubble.

Are SPACs In A Bubble?

Nathan spoke to several SPAC experts, including University of Florida Professor Jay Ritter and Stanford Law School Professor Michael Klausner. They agree that the answer to the question of whether SPACs are good investments depends on whether you are talking about pre- or post-merger investors.

Pre-merger investors usually make strong positive returns with little to no risk, while post-merger investors typically see negative returns and shoulder all the risk associated with SPACs. Klausner argues that the SPAC structure requires substantial dilution and a considerable cost borne almost entirely by post-merger shareholders.

He doesn't believe such a structure is sustainable and predicts that unless SPACs evolve, they will eventually die out. Klausner also believes the SPAC market is a bubble that's likely to burst. He noted that SPAC share prices jump on mere rumors of a deal. Further, he pointed out that substantial price pops occur on some deal announcements, which he doesn't believe are based on fundamentals.

The Year Of The SPAC

Nathan asked Ritter how the recent IPO boom compares to past cycles. He said the comparison depends on how IPOs are defined. In a typical year in the 1990s, over 300 companies went public, but 165 went public last year, excluding SPACs and foreign companies using ADRs. In the 1990s, SPACs were almost unheard of, but in 2020, there were 248 SPAC IPOs. Including SPACs, there were more than 400 IPOs last year, which is the highest number in two decades.

Another big difference between the 1990s and the current IPO boom is the fact that many tech companies have been waiting to go public, relying on venture capital instead. However, that trend could be changing, and Ritter said many companies have gotten more motivated to go public due to the high valuations the IPO market has attracted.

David Kostin and Cormac Conners of Goldman Sachs also talked about 2020 as the year of the SPAC. They highlighted another reason SPACs got so hot last year, which is that SPAC sponsors shifted their focus from value to growth. Between 2010 and 2019, over half of SPAC acquisitions were in the industrials, financials and energy sectors, but last year, 60% of the SPAC mergers completed were in tech, consumer discretionary and healthcare.

The SPAC market doesn't show any signs of slowing down, so if it is in a bubble, it hasn't reached its popping point yet. Goldman Sachs noted that in the first three weeks of this year, 56 SPACs were brought to market in the U.S.

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Report

Comment13

  • Jwl
    ·2021-02-17
    My question for the shortsellers would be : do they make a move preacquistion on the empty SPACs or Post acquisition announcements. Either way it would be equally as risky for short sellers 
    Reply
    Report
  • EZQQQQ
    ·2021-02-17
    Scary
    Reply
    Report
    Fold Replies
  • kk__soh
    ·2021-02-16
    Don't think so 
    Reply
    Report
  • Xiozinc
    ·2021-02-16
    No
    Reply
    Report
    Fold Replies
    • Xiozinc
      free coins
      2021-02-19
      Reply
      Report
    • Gibbie
      reply please for coins
      2021-02-19
      Reply
      Report
  • Huhubi
    ·2021-02-16
    I hope not
    Reply
    Report
  • francis3
    ·2021-02-16
    Good
    Reply
    Report
  • 沃斯特
    ·2021-02-16
    Good
    Reply
    Report
  • Eliselin
    ·2021-02-16
    Cool
    Reply
    Report
  • adamkok94
    ·2021-02-16
    Thanks
    Reply
    Report
    Fold Replies
    • Judgers
      Commented
      2021-02-16
      Reply
      Report
  • Chimmy
    ·2021-02-16
    EVERYTHING is in a bubble actually, not specifically SPACSIt does not makes sense the stock market are doing so well when in the real world, lots of countries are still struggling with the virus, unemployement and etc
    Reply
    Report
  • TianZi81
    ·2021-02-16
    Hmmm...
    Reply
    Report
  • Tbun
    ·2021-02-16
    No 
    Reply
    Report
  • Huat1333
    ·2021-02-16
    [微笑] [微笑] 
    Reply
    Report
 
 
 
 

Most Discussed

 
 
 
 
 

7x24

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Company: TTMF Limited. Tech supported by Xiangshang Yixin.

Email:uservice@ttm.financial