A SPAC craze this 12 months may result in riskier offers. This is why

Morsa Pictures | E + | Getty Images

In early 2021, SPACs or special acquisition companies raised record sums to bring private companies public.

The frenzy and recent plunge in SPAC stocks could lead to riskier deals in the months and years to come, which means those looking to invest in a SPAC should be careful, observers say.

According to SPAC Research, 330 SPACs have raised nearly $ 105 billion so far this year. That’s a leap from previous years – in 2020, 248 SPACs raised more than $ 83 billion and in 2019 59 SPACS raised more than $ 13 billion.

More from Personal Finance:
Here are some budget bases
Do these steps before you start spending after the pandemic
Prices are rising – that means inflation for you

“As with any other IPO, there are good and bad companies, and SPACs are mostly about sponsor,” said Peter Cecchini, research director at New York investment advisor Axonic, during an interview with CNBCs Tuesday. Closing bell. “

After a SPAC is established and money is raised for the investment, the blank check company typically has two years to identify a company, merge with it, and go public.

If the SPAC fails to complete such a merger, the money will be returned to the initial investors and the company that created the blank check firm will lose all of the capital, which can amount to millions of dollars, that it invested in the process. This is one reason that SPACs are under pressure to quickly identify and merge with a startup.

Additional pressure to merge

Recently, the performance of SPACs in the market has stalled, putting additional pressure on blank check firms trying to woo startups that are becoming suspicious of the IPO process.

The CNBC SPAC 50 index, which tracks the 50 largest pre-merger US blank check deals by market capitalization, has plummeted nearly 4% since the start of the year and wiped out all gains in 2021. Post-merger SPACs don’t fare much better – the CNBC SPAC Post Deal Index, which is made up of the largest SPACs to hit the market that have announced a target, was down nearly 14% by Tuesday’s close of trading.

However, since companies that create blank check businesses can lose millions if a deal fails, mergers are unlikely to slow significantly. Instead, if the surge in SPACs rushed to meet their merger deadlines, it could mean more room for negotiation and potential risk in the years to come.

This bodes badly for retail investors who may already be getting the short end of the SPAC stick. Such investors, especially the buy-and-hold crowd, tend to get on SPACs too late to make any significant gains and often lose money.

Because of this, SPACs recently caught the attention of the Securities and Exchange Commission, which is considering new investor protection for the investments.

“There are some real questions about who is benefiting and investor protection,” SEC chairman Gary Gensler said during a hearing last week.

With SPACs currently trading at a discount, there is currently some potential for investors to acquire shares in a deal, said Patrick Galley, CEO and CIO of Chicago-based RiverNorth Capital Management.

And investors who buy stocks before a SPAC identifies a company and merges it with it to go public have the option of withdrawing in a process called stock tendering, which could generate a profit if they were with one To be bought at a discount, Galley said.

Comments are closed.