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Is There Still Opportunity In SPACs?

Is There Still Opportunity In SPACs?
As 2021 crushes the previous year’s record for SPAC listings, is the bubble about to burst or is now the time to double down?

This article was originally published on Opto – Invest in the Next Big Idea.

Such is the clamor for special purpose acquisition companies (SPACs) that the amount raised by these investment vehicles in 2021 has already topped last year’s record-breaking total. 

SPACs have raised $79.4 billion since the start of 2021, topping the $79.3 billion that investors pumped into these so-called “blank check companies” in 2020, according to Refinitiv data. Driving this demand are retail investors seeking exposure to fintech, disruptive technology and biotech companies, along with the hefty valuations these sectors attract. 

Most of this year’s SPACs crop have listed on U.S. Exchanges, but European exchanges want a piece of the action. Frankfurt and Amsterdam have seen listings, while the UK government has backed a review proposing to make it easier for blank cheque companies to list in London.

SPACs raise capital via an IPO in order to acquire an existing private company, which can then go public while bypassing the traditional IPO process. Investors are very much betting on the investment nous of the SPAC’s investment team to target a potentially lucrative company. Bill Ackerman’s Pershing Square Tontine Holdings Ltd (NYSE: PSTH) was last year’s big beast, having raised $4 billion. Other big names in the space are Virgin Group’s Richard Branson, who has raised millions to date through three SPACs. 

See also: How to Buy SPAC Warrants

Will the SPAC bubble burst?

While the numbers are impressive, how sustainable is this trend? Opinion seems divided, although there is mounting skepticism. According to the Financial Times, shortsellers have increased bets against SPACs from $800m at the beginning of the year, to $2.8 billion — and it’s paying off. The paper notes that bets against SPACs have seen a 15% net return for shortsellers. Urging caution is London Stock Exchange chief executive David Schwimmer, who has said that the U.S. SPAC frenzy could “end poorly” for some investors.

Attracting a retail investor audience is also a double-edged sword. In Jamie Powell’s March 10 Alphaville column in the FT, the journalist notes that SPACs are targeting retail investors with deal decks that include “glossy imagery and little in the way of hard numbers bar, of course, a valuation based on a 2027 EBITDA multiple."

Engaging an audience not used to the ins and outs of how a SPAC works can work against the firm as well, especially when it comes to voting on closing an acquisition. Powell cites the example of a SPAC called Forum Merger II, which had asked investors to vote on a one-month extension to complete an acquisition. Only 61% voted in support, short of the required 65%, sending the SPAC’s share price lower. 

Where’s the opportunity?

SPACs have existed since the 1990s, but the pandemic has seen what was a niche investment vehicle enter the trading mainstream. Uncertainty in the global economy has seen companies struggle to raise capital, with SPACs emerging as a way to inject cash into a business. 

A return to normality could see investors head back to more mainstream investment opportunities, while the companies SPACs target could become more resistant to merging if capital can be found elsewhere. Rising treasury yield, interest rates, and inflation have also cooled sentiment. The Defiance NextGen Space IPO ETF (NYSE: SPAK) has seen a near-14% decline over the past month, while the IPO investment trend is down over 7% this month, according to our ETF screener

However, there could still be plenty of opportunity left in SPACs. Some of the biggest innovators in disruptive technology have gone public via a SPAC and, with tech share prices having taken a hit, now could be a buying opportunity.

Luke Langos, a senior investment analyst at InvestorPlace and the editor of Hyper Growth Investing, picks include Virgin Galactic Holdings Inc (NYSE: SPCE), which has slipped more than 35% over the past month, and DraftKings Inc (NASDAQ: DKNG). Lango also picks out QuantumScape Corp (NYSE: QS) and Luminar Technologies (NASDAQ: LAZR) — two SPACs that could benefit from the shift in focus to electric vehicles and self-driving technology. QuantumScape’s share price is down circa 49% over the past quarter, while Luminar is down about 32%.

According to Lango, there are two reasons to back SPACs right now. One is that they will eventually make IPOs obsolete. The other is that they present a way of backing the most innovative companies.

“When I look at the SPAC market, I see a lot of questionable companies. I also see some of the most innovative companies in the world – companies that are fundamentally changing the way we live and the way the world works. Those companies are great long-term investments."

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