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SPAC Risks Unmasked in Shakeup

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By kai keisuke @ Shutterstock.com

Your Survival Guy doesn’t invest in SPACs, which carve out a fortune for the founders, where you invest and they win. SPACs became very popular during the COVID-19 pandemic, but seem to be losing favor fast. Amrith Ramkumar reports in The Wall Street Journal:

SPACs, or special-purpose acquisition companies, burst onto the scene in 2020 as the hip way to take Silicon Valley’s hottest startups public. Unlike traditional initial public offerings, SPACs were seen as modern and accessible, allowing any investor to put money into the companies of the future at the same time as professional money managers.

SPACs—sometimes called blank-check firms—begin as shell companies. They raise money from investors, then list on a stock exchange. Their sole purpose is to hunt for a private company to merge with and take public. Because the company going public is merging with an existing publicly traded entity, it can make business projections and skirt some of the other regulations associated with IPOs. After regulators approve the deal, the company going public replaces the SPAC in the stock market.

Upstart companies of all stripes clamored to participate, enamored with the pool of eager investors who were ready to back them, and enticed by celebrity SPAC creators and bankers who mint money when they complete deals. The company behind dog-toy subscription service BarkBox did a SPAC merger. So did the personal-finance app SoFi Technologies Inc. Office-sharing company WeWork Inc. found a SPAC after its planned IPO infamously blew up. Electric-vehicle battery makers, flying-taxi startups, self-driving car companies and a seemingly never-ending parade of biotech names all jumped into the fray.

Now, the hype is giving way to reality. Like so many investment fads, what at first seemed like a way to earn easy money has revealed itself to be full of potential perils. The threat of tighter regulation is looming, and high-profile stumbles by some companies that went public via SPACs have taught investors some harsh lessons. It turns out investing in unproven upstarts isn’t for everyone, and with interest rates looking likely to rise in coming months, all sorts of speculative investments from technology stocks to bitcoin are getting hit.

Shares of half of the companies that finished SPAC deals in the last two years are down 40% or more from the $10 price where SPACs typically begin trading, erasing tens of billions of dollars in startup market value. Losses top 60% from the peak about a year ago for many once-hot names like the sports-betting company DraftKings Inc. and space-tourism firm Virgin Galactic Holdings Inc., founded by British billionaire Richard Branson.

Fitness company Beachbody Co. now trades under $2, nearly a year after it said it was merging with a home-fitness bike company and a SPAC that counted NBA legend Shaquille O’Neal among its advisers. Electric-scooter company Bird Global Inc., private-jet company Wheels Up Experience Inc. and the company behind BarkBox all trade below $4.

Action Line: Risk perceptions are changing quickly. Click here to sign up for Your Survival Guy’s RAGE Gauge alert, my monthly analysis of risk in America.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.