We talk to two family offices in the US about what they think about the phenomenon of SPACs - entities created to raise capital quickly to finance takeovers. They can give a fast exit for a business looking for one, but the sheer volume of launches is giving some cause for concern.
Those “blank check” entities also called Special Purpose Acquisition Companies (SPACs) have boomed over the past year, prompting some commentators to fret that they’re a bubble waiting to burst. But while the surge in activity might suggest market froth after a decade of ultra-low interest rates, there may be plenty of life in them yet.
More than $162.4 billion was raised by more than 600 issuers this year, as of mid-March (source: Bloomberg), the most ever at this point in the year. SPACs account for half of the proceeds. In comparison, just $37 billion was raised in the first three months of 2020.
This news service has been told that ultra-wealthy individuals, including those with family offices, have been involved in some of these SPAC deals, both on the corporate finance, money-raising side, and as investors. These entities have actually been around for a while. Some commentators urge market participants to be careful. The Securities and Exchange Commission has reportedly asked banks for information on their SPAC dealings. The SEC’s letters, sent by the enforcement division of the SEC, suggest that it might be a precursor to a formal investigation, a recent report said.
The winning formula for SPACs is that buyers get a 20 per cent stake in the financing vehicle at a low cost, which turns into a big stake in the target company after a merger. Sellers can go public without the hassles and restrictions of a traditional IPO.
And these features explain why SPACs appeal because they give investors in venture capital and private equity a relatively fast and cost-effective way to exit investments, as opposed to the route of a conventional IPO of a firm, Sam Sudame, senior investment manager at WE Family Offices, said.
“It is an efficient tool to exit private equity positions,” he said.
Equity markets are relatively buoyant – for now – and there are low yields on conventional assets. To those factors can be added that of people confined to working at home and playing the markets online. This may also explain the SPAC boom, he said. Stories of sports and other high-profile people getting into the act has also driven activity, Sudame said.
A few weeks ago it was reported that veteran investor Bill Foley, owner of Vegas Golden Knights, intended to issue public filings. Separately, Colin Kaepernick, the former San Francisco 49ers quarterback turned activist, was reportedly getting into the act.
“It has clearly got a lot of attention…..although they’ve actually been around a long time,” Sudame said of SPACs. “Investors see all this…..they see celebrities involved and they want to pile in.”
Michael Klausner, a professor at Stanford Law School, and Emily Ruan, a management consultant in San Francisco, recently wrote in the Wall Street Journal that the SPAC trend was a bubble and could soon burst.
SPACs generally have only two years to put money to work, building pressure to get deals done rapidly.
Michael Wagner, co-founder and chief operating officer at Omnia Family Wealth, is concerned about SPACs and wider signs, as he sees it, of market froth. His firm oversees about $2 billion in AuM.
“We are not currently invested in any SPACs but we watch the space very closely. We’re a curious outsider.”
In some ways SPACs can be thought of as a “poor man’s private equity.” “Most of them we wouldn’t go near. The barriers to entry with them are relatively low.”
Only about 20 per cent of SPACs in existence are worth a look, Wager continued. Most of them are driven by hype rather than quality supply of opportunities, Wagner said. There are “animal spirits” in the market of a sort not seen since the late 1990s dotcom boom, he said.
This is driven by a long period of very low interest rates, the fact that a lot of investors, sitting on unspent savings during the pandemic, have time on their hands, and a sort of “fear of missing out” factor, Wagner said.
Wagner says he tells clients there is a “storm coming” and that there is a one-side preponderance of enthusiasm in the market without any countervailing sense of fear. “I am not seeing much fear in the market and that concerns me.”
He said that social media – as seen during the GameStop episode, and possibly other recent events such as the surge in bitcoin, may be accelerating some of the trends at work.