Volatility hits the hot SPAC market

Shares of tech firms and special-purpose acquisition companies rose Tuesday, rebounding after a week-long losing streak that pushed some popular SPACs down 20% or more in a month.

The Nasdaq Composite rose 3.7% for its biggest advance since November, cutting a recent slide that just a day earlier dragged it more than 10% below its February high. Shares of the electric car company Tesla Inc.

rallied 20%, adding more than $ 100 billion to the company’s market value, or roughly double the value of Ford Motor Co.

Some popular companies that have gone public by merging with the so-called SPACs in recent years, including the online real estate company Opendoor Technologies Inc.,

Virgin Galactic Holdings space tourism company Inc.

and the electric car company Lordstown Motors Corp.

—Added 6% or more on Tuesday. All of them remain low at least 30% in the last month.

Tuesday’s changes highlighted the competitive dynamics unfolding in financial markets as the economy recovers from shutdowns designed to stem the spread of the coronavirus. For weeks, investors sold SPACs and popular Internet companies, rotating stocks in banks and energy producers that they believed would do better as the economy recovered and government bond yields rose.

Also called blank check companies, SPACs are shell companies that are listed on a stock exchange for the sole purpose of acquiring a private company to go public. The private company, often a startup, gets SPAC’s place on the stock market. Merging with a SPAC has become a popular way for companies to go public because the process carries more flexible regulatory requirements and generates gargantuan returns for investors on Wall Street and Silicon Valley.

Investors have invested money in SPACs at a record rate this year; About five new ones are created daily and have raised nearly $ 75 billion, according to Dealogic, a sign of exuberance because traders often bet on SPAC executives to make an attractive deal. . Even though SPACs and other hot investments rallied on Tuesday, the recent swings have many investors bracing for more turns in the coming days.

“It’s going to be more violent,” said Evan Ratner, SPAC portfolio manager at Easterly Alternatives. Unless government bond yields drop steadily, “volatility is here to stay,” he added.

With the yield on the benchmark 10-year US Treasury bond set at 1.6% on Monday, up from 1% in late January, some analysts question SPACs and other popular investments. Treasury yields, which soar as bond prices fall, fell on Tuesday, at least temporarily easing concerns about a rapid increase in economic activity forcing the Federal Reserve to raise interest rates. faster than currently anticipated.

Private companies are flooding into Special Purpose Acquisition Companies, or SPACs, to avoid the traditional IPO process and obtain a public listing. WSJ explains why some critics say that investing in these so-called blank check companies is not worth the risk. Illustration: Zoë Soriano / WSJ

Rising bond yields hurt SPACs and other tech stocks because they offer investors a more attractive alternative to speculative bets. SPACs are out of business until they acquire a startup to go public, so the huge profits at blank check signatures surprised many analysts because money was pouring into the space even when it meant buying at prices that were higher. higher than the amount of cash that SPACs. had to make a deal.

Market volatility also affected SPACs, which have not yet disclosed which companies are going public. Even with Tuesday’s rise, hedge fund billionaire William Ackman’s Pershing Square Tontine Holdings Limited.

PSTH 1.99%

has fallen 11% in the past month, slipping along with other popular SPACs such as venture capital stock Chamath Palihapitiya’s Social Capital Hedosophia Holdings Corp. VI IPOF 4.56%

and GS Acquisition Holdings Corp. II.

GSAH 0.55%

The recent twists and turns mark what some analysts call an inevitable return to earth. With the creators of SPAC clamoring to raise more money and capitalize on the excitement, some investors see the changes as a necessary reality check after a period of excessive optimism.

“You see people rushing to do it while the window is still open,” said Roy Behren, managing member of Westchester Capital Management and investor at SPAC. And among investors, “everyone wants to own the next DraftKings DKNG 2.81%

or Virgin Galactic, ”he said, referring to two of the most popular publicly traded companies when combined with blank check companies.

Tuesday’s moves showed how many on Wall Street have linked SPACs to tech stocks and cryptocurrencies, meaning blank check firms are prone to oversized moves when trend-following investors buy or sell all of those assets together.

The changes mean that huge paper gains made by active SPAC creators such as Palihapitiya and former Citigroup Inc. negotiator Michael Klein have shrunk, and some investors who piled on SPAC at high prices have taken a beating. Investors betting on falling stocks linked to the sector are encouraging change.

But the turmoil is also opening up even more opportunities for investors looking for bargains. With SPACs on track to soon eclipse last year’s record total of more than $ 80 billion raised, individual merchants have new opportunities to enter early with blank check signatures at prices generally only available to large institutions.

And some SPACs have even fallen below levels that correspond to the amount of cash they have on hand. Because investors can withdraw that cash before a SPAC is finalized, buying at or below that price can yield risk-free returns.

With nearly 400 SPACs in the market looking for companies to go public, volatility is likely just beginning.

“It’s still an extremely interesting space,” Behren said.

Write to Amrith Ramkumar at [email protected]

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