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Spac boom: price slumps, short sales and lawsuits unsettle investors

2021-03-31T10:58:26.192Z

Billions in the USA and increasingly also in Europe flow into Spac purse jackets. But recently the share prices of the papers collapsed - investors were unsettled from several sides.



Enlarge image

The dark side of power (Darth Vader mask from the movie "Star Wars"):

After the boom, there is uncertainty

Photo: HO / REUTERS

Which had

Martin Blessing

(57) safe differently.

The former Commerzbank boss started a few days ago with one of the first Spacs in Europe on the Amsterdam stock exchange.

With the shell company European FinTech IPO Company 1 (EFIC1), he wants to acquire a promising fintech company in the near future, which can easily get a listing in this way.

Blessing has collected a total of 415 million euros from investors for this purpose.

But EFIC1's stock market debut was not very promising: The share price came under pressure from the start and closed on the first day of trading with a minus of more than 2 percent.

So far, the paper has only partially made up for the losses.

Even

Klaus Hommels

(54) fared little better.

The venture capital investor from Zurich, who used to be known for his involvement with Skype, Facebook or Xing, made headlines weeks ago when he mobilized 275 million euros for Germany’s first ever Spac.

His shell company Lakestar Spac I, which has been looking for a takeover target in the tech sector since the IPO in February, started with a share price of EUR 11.15.

A good month later, the paper is about 8 percent lower.

The examples have symbolic value.

The business with Spacs, i.e. with Special Purpose Acquisition Companies, which are listed on the stock exchange as an empty company shell, only to then acquire an operational company and thus bring it to the stock market, has recently suffered some dampening.

And that in the midst of the current boom that the market - which is currently expanding from the USA to Europe - has been experiencing for months.

According to a recent analysis by the consulting firm EY, there were a total of 267 Spac issues with a total volume of 83 billion dollars worldwide in the first quarter of this year.

That is more than all of 2020, in which there were 255 issues with a volume of 81.5 billion dollars, according to EY.

But can there be sufficiently attractive investment goals for all the billions in investor money, i.e. companies that go public with Spac?

That is just one of the many questions that more and more actors are apparently asking themselves.

Doubts that go hand in hand with other warning signals: Investor advocates express concerns or file lawsuits right away, financial supervisors are skeptical, shortsellers have discovered the market niche for their bets on falling prices.

Spac share prices drop by a quarter

And investors are apparently increasingly realizing that they have to look very carefully at this investment trend as well.

No wonder: Who would not listen carefully if a company like the US office rental company Wework, whose attempt at a regular IPO in 2019 turned into a debacle, now also announces that it wants to start a second attempt at the stock market via Spac.

The demand for Spac shares has recently declined noticeably.

For example, the IPOX SPAC Index, which tracks Spacs stock prices on Wall Street, has plummeted nearly a quarter since a high in February.

This setback also reflects the risks investors, particularly in the USA, have taken in recent months - and that they may now want to shift down a gear.

According to an analysis by the US bank Goldman Sachs, around 50 percent of the savings of Americans and the investments of investment and pension funds there are now in stocks.

That's the highest figure since the tech bubble 20 years ago, according to the bank.

In addition, many investors leverage their chances with the help of warrants - and thus also increase the investment risk.

The fatal consequences such an investment strategy can have can be seen these days with the imbalance of the US hedge fund Archegos Capital, which built up a multi-billion dollar portfolio with enormous leverage that is now flying around the ears itself and cooperating banks.

Investor flight on the Spac market was recently accelerated by reports that the US financial regulator wrote to various providers and asked critical questions.

The US supervisors are by no means alone with their skepticism: The Swiss financial regulator Finma is also currently slowing down the first SPAC IPO for the Confederation because it has questions about investor protection.

There are many other warnings.

According to Stanford University, for example, eight lawsuits related to Spac deals have been filed in the United States since the beginning of the year.

The plaintiffs accuse the blank check companies of hiding weaknesses in the takeover targets.

Another concern is the increased risk of insider trading between the time a Spac IPO and the announcement of the takeover target.

As if all of that wasn't enough, shortsellers have long since become aware of this market niche.

They apparently consider various Spac takeovers to be overvalued - and are betting on falling prices according to the tried and tested pattern.

The best-known example is the electric car manufacturer Nikola, also a company that went public on the stock market via Spac.

The US short-selling specialist Hindenburg Research came on the scene last year and attacked Nikola with allegations that he had made false statements about the progress of his business and thus misled investors.

Result: Nikola founder

Trevor Milton

(38) had to resign as Executive Chairman of the company and the share price collapsed massively.

To date, the paper has not recovered from the losses.

Spacs don't just buy young growth companies

Hindenburg Research is also targeting the electric car start-up Lordstown - in that case, too, the share price was already falling rapidly.

In addition, short sellers are reportedly speculating against the fintech Social Finance and the Spac CCIV.

It is obvious that such developments are hardly suitable for attracting additional investors to the Spac market.

But if you are already writing off the deal, you may be jumping too far.

Oliver Scharping, for example, portfolio manager at the investment company Bantleon, believes the recent price declines in Spac paper are merely a "healthy correction" in a market in which the shares were already trading at an average premium of 25 percent on their actual value.

"Keeping calm is the best thing investors can do now," writes Scharping in a current market assessment.

The professional also emphasizes that Spacs are by no means exclusively focused on fast-growing, but still unprofitable tech start-ups.

"The spectrum ranges from the Spac of the well-known value investor

Bill Ackman

(54, Pershing Square Tontine Holdings) to the first mining Spac (African Gold Acquisition Corp.)", he writes rather.

Expert advises against direct investments

The USA in particular is a pioneer when it comes to bringing not only growth companies but also "real value opportunities" to the stock exchange via Spac.

As an example, Scharping cites hedge fund celebrity Bill Ackman, who used a Spac-like structure years ago to bring the fast food chain Burger King back to the stock exchange.

The man from Bantleon believes that "the notorious tech critic" Ackman is planning something similar with his two current Spacs.

The Volkswagen subsidiary Porsche, the Uber rival Grab, the Munich solar car developer Sono Motors, the air taxi start-up Lilium - there are already a number of candidates for upcoming IPOs, and quite a few of these companies are likely to make their way onto the stock market decide via Spac.

So there will continue to be diverse investment opportunities for investors in this area in the future.

Investment professional Scharping advises private investors against direct investments in the SPAC market.

Only professional investors have the know-how for the complex legal analysis of these vehicles, he says.

In his opinion, private individuals should rather rely on special "event-driven funds".

Their managers are also more familiar with the business, believes Scharping.

cr

Source: spiegel

All news articles on 2021-03-31

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