To the detractors of special purpose acquisition companies, so-called blank cheque vehicles, they are just a modern twist on an infamous venture from the 18th-century South Sea Bubble. The story, probably apocryphal, has it that the speculative mania was so great that one canny operator set up a company “for carrying on an undertaking of great advantage, but nobody to know what it is”, an obvious and barefaced fraud. Today’s special purpose acquisition companies involve “sponsors” listing a shell and only afterwards finding a target with which to merge it; investors can ask for their money back — with interest — if they dislike the potential acquisition.
Naysayers can find some comfort from the prospect that Spacs now appear to have passed their peak popularity. Multiple listings have been pulled this year, amid volatility in markets. That is all to the good: at their worst, Spacs are just one example of an over-exuberance in stock markets, based on the idea that equity values should inexorably rise and taking advantage of over eagerness to engage in what had many of the hallmarks of an unsustainable tech bubble. A market correction — so long as it does not provoke a wider financial crisis — provides a salutary reminder of the inherent risks in investing and the importance of due diligence.
But just as the end of the South Sea Bubble did not mean the end of the joint stock company, so too the recent setbacks for Spacs should not mean the end of the idea. Ordinary investors rightly want access to early-stage, often private, technology companies while those same companies find many of the requirements for listing in the public markets onerous and costly. Financiers who can match the two groups are making mutually beneficial trades, allowing the companies to access a deeper pool of capital and investors to access, admittedly risky, but potentially lucrative investments.
For now, however, investors should welcome the deflation of Spacs. Since Jay Powell, chair of the Federal Reserve, suggested the central bank would accelerate its plans to tighten monetary policy, the riskiest parts of markets have sold off. That includes these vehicles for quickly listing a private company as well as cryptocurrencies and lossmaking technology stocks. The ARK Innovation ETF, another means of giving ordinary investors access to high growth technology companies, has lost two-fifths of its value since November.
Spacs have also come under increasing regulatory scrutiny. The US Securities and Exchange Commission has launched a flurry of investigations of the deals, due to the concern they are bypassing traditional disclosure requirements. Corporate frustration about the costs of listing are understandable but investors should be informed, accurately, about what they are buying. The more fundamental issue is a conflict of interest between the companies’ investors and their sponsors. Sponsors, who are partly remunerated by options that vest upon buying a target, have an incentive to ensure that acquisitions go ahead even if they are not worthwhile.
If Spacs return, then investors, as well as regulators, will rightly have a more jaundiced view. That is down to experience: many Spacs have performed badly following their acquisitions and that, as much as any regulatory or monetary action, is behind them falling out of favour. It is good that the cyclical froth is being blown off overvalued private assets, just as in public markets, but investors should not count out the secular trend driving technology investment.