Blank-check investing, especially in the technology sector, is encouraged by abundant liquidity. Special vehicles raise funds in a flash and get listed unchecked in the U.S. But some investors question this practice.
One consequence of abundant liquidity is the boom of SPACs, or Special Purpose Acquisition Companies. It is a well-known form of accelerated listing in the U.S. that is mainly used for high-speed exits by tech-investors. Many Swiss investors are familiar with SPACs, as these vehicles have bought and listed many startups.
Adam Said, owner of Geneva-based investment firm Ace & Company and a high-profile investor in Swiss companies like SIG, Swissquote or Sophia Genetics, has exited last year at several return multiples from three U.S. startups he held in his portfolio (ChargePoint, Eos Energy and Momentus Space) when three different SPACs jumped in to take them over.
SPACs have become a common way, on Wall Street, to list startups with few or no questions asked. That is their main feature. First, an empty vehicle is listed. It doesn’t need to disclose any information, as its sole purpose initially is to raise money for an ulterior acquisition. Investors are supposed to fund the vehicle at this stage, without knowing what it will buy next. Once listed, the vehicle then makes an acquisition of its choice, usually a startup, which ends up listed through this process without going through the legal routines or disclosing financial reports. Investors and fund selectors don’t get a chance to see the company figures, or talk to the management.
This very loose way of doing things has had much success: SPAC IPOs have raised about $140 billion in 2020, almost all of them in the U.S. That is the highest yearly figure on record, surpassing the levels seen in 2000, according to Bloomberg. And this volume is ten times higher than in 2019, which provides evidence that the increased Fed liquidity is a key factor in the SPAC boom.
Some investment firms express concern about the quality of the SPAC offerings. But since the SPAC is often created by a renowned hedge fund figure like Bill Ackman (Pershing Square Capital), or a private equity or a venture capital firm, investors get easily on board, investing blindly, or signing a blank check.
Bill Ackman raised as much as $4 bn last year, mounting the biggest-ever SPAC. In 2017, venture capitalist Chamath Palihapitiya used a SPAC to take a 49% stake in Richard Branson’s Virgin Galactic. But in these undiscerning times, it’s not only prime investors who manage to raise funds, it’s basically anybody, according to some professionals. «What’s worrying is the ease with which people, even those without a public track record or a demonstrated capacity to invest well, can raise money in SPACs, says Daniel Pinto, CEO of Stanhope Capital, a London-based independent asset manager. He advises investors to «study the track-record of the sponsoring team and evaluate the attractiveness of the targeted sector before putting money in a blank-check firm».
How did this blind type of investing come to be so widespread? «It is a sign of rampant speculation», billionaire investor Sam Zell told CNBC in early February. Some SPACs remind him of the speculation in internet companies during the 1990s dot-com bubble. When there is such an urge for startup investors to exit, and for other investors to buy into tech, with loads of cheap funding available, it seems boring to go through all the hurdles of a classic IPO (initial public offering).
Establishing proper accounts that respect certain financial thresholds and certain corporate governance requirements, having the figures audited, going through some due diligence, looks like a waste of time. These lengthy rules are followed when there isn’t enough money around and investors are selective. But in the context of free credit and SPACs, the listing is done much quicker, with no prospectus, investment bank or roadshow needed. All of these cumbersome stages have somehow been thrown to the wind with the surge of SPACs, despite the risks that are inherent to this opaque and poorly regulated process.
Defenders of SPACs praise them for providing liquidity to innovative ventures, and for such being flexible conduits for money cashing out of private equity and rushing into IPOs. Indeed, as long as the Fed supports the market and rates are so low, there is a market for SPAC creators.
But it remains a risky investment and there are as many critics of the lack of regulations of those listings as there are fans of the effectiveness of these transactions. Some even claim that SPACs are incompatible with ethical investments because, absent a way to assess the environmental or social impact of the business, it isn’t an adequate vehicle for people worrying about the climate or social impact of their investments.
The lack of transparency about the end target is not to the taste of some ESG funds in particular, including those of Amundi or Sanford Bernstein, who expressed their criticism in a recent Bloomberg article. Good governance is among their key investment criteria.