What happened to all those SPACs? Earlier this year, special-purpose acquisition companies were market darlings—and symbols of stocks’ building emergent froth. These “blank-check” firms appealed to investors seeking quick, easy windfalls, starting to echo 2000’s IPO boom-a-thon turned bust-a-vortex. Today? Poof! Former President Trump’s new eyeball-grabbing deal aside, SPACs have nearly disappeared due to big blowups and regulatory woes. No surprise—SPACs never held market magic. Viewed correctly, though, they do help foretell stocks’ future. Here is why their about-face is actually bullish.
First, SPACs aren’t new. They date back to 1993, emerging in the US as more-regulated alternatives to sketchy “blind pools” prone to pump-and-dump schemes. The first SPAC—Information Systems Acquisition Corp—raised a mere $12 million. SPACs remained fringe investments for 27 years, until late 2020 brought a US-driven bonanza. Why? These shell companies conduct initial public offerings (IPOs) and then acquire a private firm. Voila! Their targets become public—cheaply and with significantly reduced regulatory hassle. Many envisioned these IPOs as fast money, giving SPACs sparkle. Regretful SPAC investors can even redeem their initial funds before the SPAC merges—with interest!
After raising a modest $14 billion globally in 2019, SPAC IPOs boomed to $81 billion in 2020. Then the craze ignited. Just in Q1 2021 they raked in $95 billion, nearly half of all global IPO proceeds. From August 1, 2020 through mid-February, US SPAC stocks rose 92%, trouncing the S&P 500’s 20%. It had the emergent feeling of the euphoric froth that usually precedes global market peaks—like early 2000’s mindless IPO frenzy.
Now? SPACs’ shine faded fast. High-profile busts exposed low-quality acquisitions. Hotly hyped electric vehicle firms Lordstown Motors and Nikola both imploded amid fraud accusations. Hundreds of SPACs have yet to find suitable acquisition targets, while headlines feature more nixed deals than consummated mergers. Many SPACs must return cash to shareholders if they can’t soon seal a deal, per standard SPAC stipulations. Legal and regulatory woes loom, too. US legislators have SPACs in their crosshairs, and about 15% of US securities class-action lawsuits involve them. Global SPAC IPO proceeds plunged to $33 billion total over the past six months—less than March alone! In Q3, shareholders redeemed over half their initial SPAC investments. SPAC stocks sank.
These woes echo what I’ve said since my 1987 book The Wall Street Waltz: IPO actually stands for “It’s Probably Overpriced.” SPACs aren’t special—they‘re just IPOs. Firms go public when prices are favorable to them—hence unfavorable to buyers. IPOs almost always benefit creators, not average investors. Hedge funds and others with early access might win. But retail investors dreaming of “the next big thing” buy high later and normally lose. With SPACs, investors trust sponsors to find a business without even disclosing targets. Firms they buy often aren’t ready to go public, but bite when wooed with huge sums. Quirky rules give early investors warrants they can exercise after redeeming their initial funds. Even if the stock soars, shareholders’ stakes get diluted as hedge funds exercise those warrants.
But SPACs can still give you an edge. How? View them as a sentiment gauge. IPO insanity has historically been a sign of bubbling stock market euphoria—which brings unattainable expectations priming bull markets for negative shocks. I don’t just mean 2000. IPO spikes, if big enough, have a long history of presaging market peaks. In The Wall Street Waltz, I wrote that 1986’s record-breaking issuance was a warning. The 1987 crash and bear market soon followed. Early 2021’s building SPAC froth seemed like yet another emerging case of IPO issuance signaling emerging euphoria. But, it never fully blossomed. Died on the vine!
So did the emergent euphoria. Yes, Trump’s deal rekindles some SPAC sparks—raising the doubly dangerous combination of IPO greed and political bias. But like anything Trump-related, it spurs as much loathing as love. And beyond it, little enthusiasm remains. Talk of an Asian SPAC reboot taking hold centers less on quick paths to riches and more on preempting overheating. Hong Kong’s proposed rules feature minimum fundraising targets, bar retail investors from pre-merger buying, and require promoters to possess significant experience as money managers or senior executives at big public firms—hardly the makings of euphoric, get-rich-quick schemes. Singapore’s September move to allow SPACs? Mostly an effort to boost a languishing IPO scene and keep domestic startups from fleeing overseas. No froth there, either.
If SPAC fever does eventually reignite, beware—that would be a sign global sentiment is overheating. For now, though, welcome the skepticism. It is part of the broadly rising fear checking expectations that I wrote about in my September 24th Real Clear Markets column.
It is a sign of sentiment having rested and reset lower, teeing up the positive surprise that drives stocks higher. Ignore those who see sinking SPACs as warnings. The froth was the warning. Its absence is a signal of world stocks have more room to run.
