Over the past two years, it has felt like almost everyone — from Jay-Z to Shaq O’Neal to Bill Ackman — had listed a cash shell on the stock market.
The vehicle — known as a Spac, or special purpose acquisition company — involves herding a group of seasoned and/or celebrity investors together, picking a catchy company name, and then trying to convince Joe retail pumper Public to chuck money into it. Which, since 2020, has been done almost too readily. In 2021 alone, over $150bn alone was raised.
The newly cash-rich “company” then sets out to find to a quality private business to gobble up. Which, in theory at least, should make everyone rich in the process. If the cash isn’t spent, it gets returned within a set time limit.
The problem is, the boom has rapidly turned to a bust. Over the past six months, according to Goldman Sachs, the average post-acquisition Spac has declined 43 per cent with some seeing almost all their value wiped out, like British electric vehicle company Arrival, which is down nearly 90 cent from its all time highs.
You might instinctively think, then, that now Spac-mania has turned to a Spac-splat, we’d soon be hearing the end of it.
Yet there’s a slight wrinkle here: despite the dreadful market sentiment, there’s still an awful lot of cash sitting in Spacs looking for a target. How much, you ask? Well, as of February 3, $144bn to be exact:
Via Goldman:
According to the analysts at Squiddy, 406 of these idle Spacs are set to expire by the first half of 2023. Which, if you ask us, is quite a wait to get your money back.
Still, patience seems to have its place in markets. The excellent Jon Sindreu of the Wall Street Journal has a neat Heard on the Street column up this morning about hedge funds using these driftwood vehicles as places to park their cash.
From the article:
SPACs can indeed play this role if bought at the right time, which may be counterintuitive but has long been known among hedge funds. It stems from the minutiae of how the vehicles work: Investors are allowed to demand their money back before a merger is completed, or once SPAC sponsors run out of time to find a target—often after two years. Meanwhile, the cash is placed in a trust that earns interest from ultrasafe securities. What is more, whenever negative market sentiment pushes SPAC stocks below the value of their share of the trust, investors who buy in are guaranteed extra returns at maturity—and without ever holding a single share in an air-taxi company.
What’s more, if your Spac-as-cash choice does end up doing a deal with a company in an over-hyped sector, it might suddenly moon even before the merger is completed. So you get all the safety of cash, and a higher yield to boot, with the upside of a stonk.
Sounds almost too good to be true.
Related Links:
It’s Official: SPACs Are the New Money-Market Funds — WSJ
