What do rap mogul Jay-Z, soccer star Robert Lewandowski and ex-US economics minister Wilbur Ross have in common? They give their names to so-called Special Purpose Acquisition Companies - Spacs for short - and thus fuel one of the currently most controversial hype on the financial market. Spacs are initially just empty corporate hulls. They list their shares as a kind of placeholder in order to later be merged with companies and thus to bring them to the stock market through the back door.
For investors, this means that a blank check is issued to the respective Spac. After all, it is usually unclear at first which company you ultimately invest in using such a financial vehicle. Seen in this light, investors buy the proverbial pig in a poke and then have to hope that the initiators will prove a lucky hand in their search for a good stock market candidate. Nevertheless, Spacs are currently experiencing an unprecedented boom, which some experts consider to be an increasingly risky phenomenon.
Shorter way to the stock exchange
In addition to cryptocurrencies and speculative objects such as “meme” shares from companies such as Gamestop, the empty wallet covers are the hottest topic in the financial world this year. According to the market researcher SPAC Research, 2021 such special-purpose vehicles were listed on the US stock exchange in 298, raising a total of 97,3 billion dollars, the equivalent of 82,8 billion euros. The record from the previous year, when 248 Spacs generated around 83,4 billion dollars, was caught in less than three months. In 2020, more money was raised from investors with Spacs than in the entire previous decade.
What are the reasons for the hype? Who will benefit? And: what dangers does it pose? From the company's point of view, the merger with a Spac is above all a shortcut on the way to the stock exchange, which can save costs for advice and support from investment banks and the expense of a classic premiere on the stock market. The blank check concept has long been widespread in other areas of the professional capital market. Many private equity funds, for example, have always collected enormous sums of money from investors without clearly saying in advance what exactly should be done with the money.
Spacs aren't new either, they just haven't played a huge role in the past, which makes the recent boom even more astonishing. According to Stanford professor Michael Klausner, who has conducted intensive research on the subject, the biggest winners are the so-called sponsors of the Spacs. They finance the first deposits and usually receive 20 percent of the shares in the special-purpose vehicles before other investors get on board. According to Klausner, most of the money comes from hedge funds, which are also known in the market as the "Spac mafia". You get involved early on with the IPO - at lucrative conditions.
500 percent return
If a company is subsequently floated on the stock exchange through a Spac merger, which the financial vehicles normally have two years to do, the sponsors can rub their hands together. According to Klausner's study, they made an average of 2019 percent return between January 2020 and June 500. Institutional early entrants also performed well, but most investors with shares in companies that went public through Spac mergers suffered losses. According to the analysis, they lost an average of twelve percent in value in the first six months, although the stock market rose sharply overall.
For Klausner, it is only a matter of time before the bulk of Spac shareholders understand how much they are disadvantaged by the structure of the financial vehicles. What happens then is clear: “The Spac bubble will burst.” At the moment, the business with the stock market covers is attracting more and more celebrities - a phenomenon that has already been observed in other excesses on the financial market in the past. The list of well-known names involved in the Spac hype ranges from sports stars like Shaquille O'Neal, Serena Williams and Robert Lewandowski to entertainment greats like Jay-Z or Ciara to top politicians and managers like Larry Kudlow or Gary Cohn .
In view of the increasingly blatant proportions that the boom is assuming, the US Securities and Exchange Commission recently saw itself prompted to issue a warning. The fact that celebrities advertise Spacs or are even involved as sponsors and investors does not mean that they are suitable investments, the authority warned. It is never a good idea to put money into a Spac just because someone famous is recommending it.
Mania limited to USA
While experts and supervisors are ringing the alarm bells in the US, the Spac mania has not really caught on in Europe. In Germany, for example, there was only one Spac IPO recently. Start-up investor Klaus Hommels brought the first such corporate shell in more than ten years to a German stock exchange, albeit without a goal so far. The tension is now rising in Frankfurt's financial district: is it a lasting trend or a one-day flyer? In any case, the topic is also a concern for a number of German managers. For example, ex-Commerzbank boss Martin Blessing wants to raise up to 415 million euros with a spac on the Amsterdam stock exchange. Rocket Internet co-founder Oliver Samwer and Hellofresh boss Dominik Richter have already set the course, albeit on the US stock exchange.
Deutsche Bank is another beneficiary of the Spac Bonanza. The financial institution, which has actually been in crisis for years, is one of the big winners of the boom despite staff cuts in its share analysis and is picking up more deals than major US competitors such as Bank of America or JPMorgan Chase, the US financial service Bloomberg recently reported. But that carries the risk of a setback if the hype ends suddenly. Deutsche Bank, however, seems unconcerned. The financial institution emphasizes that the company has been in the Spac business for more than ten years and has already experienced other market fluctuations. (dpa)