PSPC managers emerge as the undisputed winners of the PSPC boom and bust
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With SPACs, the house always wins, even if investors lose their shirts.
The blank check companies behind the public listings of brands such as DraftKings, WeWork and BuzzFeed often reap big gains, even as stock market investors get stung by the instant slump in valuations after these companies go public, according to a forthcoming article published in the Review of Financial Services,
There’s a SPAC for that
The manic two-year-old SPAC craze faded quickly as soon as the calendar year rolled into 2022, and the average investor was probably happy to say goodbye to it. Investors lost, on an annual average, 37% of their investments in SPAC companies from 2015 to the end of September, according to the research paper. But sponsors, hedge funds, private equity firms and the oddball Super Bowl champion, who typically contribute about 5% of the initial funding before raising the rest from investors, fared much better. In fact, they turned an average investment of around $8 million before the merger into around $54 million. Yes, that’s a mind-blowing annualized rate of return of around 110%).
In an example given by The Wall Street Journal this weekend, financial services company Cantor Fitzgerald made $35 million after investing less than $10 million to complete a SPAC merger with laser technology company AEye inc, which saw the course of its shares have fallen more than 90% since its IPO. This fortuitous quirk comes down to favorable terms and fees for sponsors – perks that are now under intense scrutiny amid the collapse of SPAC:
- SPAC sponsors typically earn a “promotion” bonus of around 20% of the value of the SPAC once the merger is complete, a rate that is largely set by market dynamics and is intended to compensate the sponsors for taking on the risk. to launch a SPAC.
- But with the stock prices of post-merger SPAC companies regularly falling by as much as 90%, these fees have been criticized as somewhere between overly generous and wildly misleading. In March, the SEC even proposed new disclosure requirements to make these fees more transparent.
Risky business: Blank check companies that list their shares before a merger are finding it increasingly difficult to find a company to merge with. It’s kind of a sticky one-stop shop for SPACs that typically only have two years to complete an acquisition and take a company public. If they are unsuccessful, the funding may be returned to the original sponsors. Only 58% of blank check companies listed in 2020 closed on an acquisition target, Barrons reported in February, which means dozens of these companies have spent 2022 racing to finalize a merger before their deadlines. SPAC King Chamath Palihapitiya closed two of its 10 SPAC tech funds in September after failing to strike a deal. Wall Street can be done with this weird mix of speed dating, musical chairs and risky IPOs.