- It’s a tremendous time for SPACs, providing a way for startups to go public without the IPO hassle.
- Retail investors see SPACs as an opportunity to get into the next Apple or Google early.
- The big winners are CEOs and celebrities who usually get a payday for lending their names to SPACs.
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A debate is raging on Wall Street and Main Street about SPACs, the financial engineering flavor of the moment. Depending on who you ask, these so-called blank check companies – funds raised for the sole purpose of buying and disclosing a business – are either the latest get rich quick scheme for financial charlatans or the greatest innovation in the capital markets . in years.
Let’s leave out some of the drama right away: exaggerate both points of view. That said, exactly who is sure to make money here – hint: not the backward crowd – is the ultimate story. SPACs, short for special acquisition companies, are a hidden godsend for bankers, lawyers, capital-hungry entrepreneurs and, crucially, the privileged few who already have extraordinarily well-connected and can benefit by simply lending their name to a project.
At the same time, SPACs are neither new nor particularly innovative. They have been around for years, although they have mostly been sent to a dark corner of the financial industry. Still, it’s still worth understanding why they’re all of a sudden furious – and who’s going to be hurt when the furor inevitably fades away.
Organizers of a SPAC ask investors to give them money to establish a publicly traded shell company. These sponsors, who typically invest a modest amount while allocating themselves 20% of the scale, then go on the hunt for a private target company eager to go public. It is an opportunity for investors to earn high returns in an era of ultra-low interest rates. And for the target companies, especially those that might otherwise have struggled to go public, it is a fast path to an IPO. Virgin Galactic, DraftKings and, more recently, the genetics company 23andMe and the dog walking app Rover, have all agreed to be bought by a SPAC.
In short, a SPAC is like a pop-up private equity firm, but without the diversified portfolio. The SPAC makes exactly one investment and then leaves, a process known as “de-SPACing”. The risk is that as more and more SPAC deals are made, each will have fewer companies to choose from. Last year, 248 SPACs raised $ 83 billion, according to SPAC Research, a convenient Chicago company emerging as something of a Bloomberg terminal for the SPAC world. This year there have already been 134 new SPAC deals that have raised $ 42 billion. Before last year, there were less than 200 deals in the past seven years combined.
Software entrepreneur Aaron Levie recently joked on Twitter, “Little known fact: We’ll hit the singularity as soon as there are more SPACs than real companies.” Healthy development is at play here. In an era that ended with the burst of the dot-com bubble in 2000, companies went public at much earlier stages in their development than since then. Apple, Microsoft, Amazon and others gave retail investors the opportunity to get in relatively early.
SPACs, flawed as they may be, give investors that opportunity today. Consider a deal this week in which Alta Crest, an SPAC overseen by veteran investment banker Ken Moelis, injected $ 1.1 billion into a Palo Alto, California, flying taxi manufacturer called Archer Aviation. United Airlines, which is also investing, announced a $ 1 billion order for Archer’s planes to set up a short-haul taxi service between airports. The downside: Archer doesn’t plan to deliver its distant planes until 2024, which is also the first year it expects revenue. That’s as early – and speculative – as it gets.
And that’s the problem. Investors in SPACs are taking off. (Literally, in Archer’s case.) As for who’s just going to ride it, consider the growing number of established executives and other prominent people sitting on boards or advising SPACs. This group can make hundreds of thousands of dollars without doing too much work.
For example, a SPAC called Forest Road Acquisition, associated with ex-Disney bigwigs Kevin Mayer and Thomas Skaggs, buys well-known fitness company Beachbody. Advisors also include hoops star Shaquille O’Neal and human rights defender Martin Luther King III. Stanford professor Fei-Fei Li and Kristina Salen, World Wrestling Entertainment’s chief financial officer, are part of the team advising the SPAC founded by entrepreneurs Reid Hoffman and Mark Pincus. And Vy Global, the SPAC offshoot of a venture capital firm, counts Facebook executives Hugo Barra and Javier Olivan, as well as Reddit CEO Steve Huffman, as its directors. (Another Vy fund recently invested in Reddit, leading some on the Reddit board Wall Street Bets to question whether Vy’s SPAC would buy the entire company.)
It’s not that these people don’t add value. Their networks alone are useful for raising money. Some also invest together with the founders of SPAC. But they all have full-time jobs, making this the newest side hustle for the well-off.
It’s more or less clear how this will all end. Good deals lead to bad deals. The volume will dry up as soon as interest rates rise. A few companies will grow big, while many more will evaporate when the bubble bursts.
And the financial engineers and those who serve them will move on to the next new one.
The Wall Street Journal reported on Wednesday that the buyout of TikTok by Oracle, Walmart and others has been indefinitely postponed. In my first Insider column, on Nov. 13, I noted that the deal made sense for Oracle, which is struggling to build a cloud company to compete with Amazon, Microsoft and Google. But the deal was bad policy from the start as it was an erratic dictation from a transactional president seeking “ key money ” for his troubles. I said at the time that the deal would likely wilt in a Biden administration. I’ve been told that Google, not Oracle, remains TikTok’s cloud provider.
Is it just me, or has Twitter become immeasurably more enjoyable since it removed the 45th President of the United States? I find my feed interesting, informative, entertaining and downright bourgeois these days. YOU?
Adam Lashinsky is a Business Insider associate and former editor-in-chief of Fortune magazine, where he spent 19 years. He is the author of two books: “Inside Apple” (about Apple) and “Wild Ride” (about Uber).