Investors who bet against stocks are targeting special-purpose acquisition companies, one of the hottest growth areas on Wall Street. The dollar value of bearish bets against shares of SPACs has more than tripled to about $2.7 billion from $724 million at the start of the year, according to data from S3 Partners.
Some of the stocks under attack belong to large SPACs that surged in recent months, in part because they were backed by high-profile financiers. A blank-check company created by venture capitalist
Chamath Palihapitiya
that plans to merge with lending startup Social Finance Inc. is a popular target, with 19% of its shares outstanding sold short, according to data from S&P Global Market Intelligence. The short interest in
Churchill Capital Corp. IV,
a SPAC created by former investment banker
Michael Klein
that is merging with electric-vehicle startup Lucid, more than doubled in March to about 5%.
Others are wagering against companies after they combine with SPACs. Muddy Waters Capital LLC announced last week it was betting against
XL Fleet Corp.
, a fleet electrification company that went public in December after merging with a SPAC. XL has since said Muddy Waters’s report, which alleged XL inflated its sales pipeline and made misleading claims about its technology among other issues, had “numerous inaccuracies.”
XL’s stock price dropped the day Muddy Waters released its report by about 13%, to $13.86, from its prior close on March 2. Shares closed Friday at $12.79.
Shares of
Lordstown Motors Corp.
fell nearly 17% Friday after Hindenburg Research released a report saying the electric-truck startup had misled investors on its orders and production. The company, which merged with a SPAC in October, said the report contained half-truths and lies. The short interest in Lordstown shares rose to 5% from 3.4% in the week before the report’s publication, according to data from S&P.
“SPACs are an area of focus,” said Muddy Waters’s
Carson Block.
The veteran short seller said SPACs largely make up the universe of companies he views as both “abysmal” and relatively free from technical challenges, such as high short interest, which can make betting against them difficult.
SPACs are shell firms that raise capital by issuing stock with the sole purpose of buying or merging with a private company to take it public. They are dominating the market for new stock issues, becoming a status symbol for celebrities while pumping the value of acquisitions, like betting company
DraftKings Inc.,
into the tens of billions of dollars.
Hedge funds that buy into SPACs early see them as a way to make lofty returns without much risk. Individual investors are attracted by the chance to get positions in newly public companies that they could rarely purchase through traditional IPOs. The Securities and Exchange Commission issued a statement on Wednesday warning that it “is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it.”
A monthslong rally in the stocks lost steam recently amid a broad selloff in technology and high-growth companies. An index of SPAC stocks operated by Indxx fell about 17% from mid-February to March 10, while the Nasdaq Composite Index declined about 7.3% over the same period.
“These are all momentum stocks, and a lot of people want to short them,” said
Matthew Tuttle,
whose firm Tuttle Tactical Management runs an exchange-traded fund that allows investors to hold a portfolio of SPAC stocks. Mr. Tuttle is preparing to launch an ETF that bets against “de-SPAC” stocks of companies that have merged with a SPAC—like electric-truck manufacturer
Nikola Corp.
and baked-goods maker
Hostess Brands Inc.
—and a separate fund that invests in the stocks.
Private companies are flooding to special-purpose acquisition companies, or SPACs, to bypass the traditional IPO process and gain a public listing. WSJ explains why some critics say investing in these so-called blank-check companies isn’t worth the risk. Illustration: Zoë Soriano/WSJ
Postmerger companies are particularly attractive to short because they have larger market capitalizations, making their shares easier to borrow, and because early investors in the SPACs are eager to sell shares to lock in profits, analysts and fund managers said.
Short sellers borrow stocks they believe are overvalued and immediately sell them, hoping to repurchase the shares for a lower price when they need to be returned and to pocket the difference. The strategy proved dangerous in recent months when individual investors organized on social media to push up stocks like GameStop Corp., forcing short sellers to buy shares and cap their losses, helping to drive prices still higher.
Continued strong investor demand for SPACs could catch short sellers in a similar squeeze. Shorting SPACs can also be risky because their shares have a natural floor at $10, the price at which they can be redeemed before a merger, and because they are prone to sharp price moves, analysts said.
Still, the portion of shares sold short in SPACs and their acquisitions is climbing.
A blank-check company created by venture capitalist Chamath Palihapitiya that plans to merge with lending startup Social Finance Inc. is a popular target.
Photo:
Brendan McDermid/Reuters
Some are betting against stocks they believe rose too fast, to unsustainable valuations. The price of bioplastics company
Danimer Scientific Inc.
nearly tripled to $64 in the first six weeks of the year after it was bought by a SPAC. The short interest in Danimer stock has climbed to 8.5% from around 1% in January, and its share price has traded down to about $42, according to data from S&P.
Others are making bearish bets to hedge against potential losses in SPAC stocks they own.
Veteran short seller
Eduardo Marques
cited SPACs and their boosting the number of U.S.-listed stocks as a short-selling opportunity, according to a pitch for a stock-picking hedge fund called Pertento he plans to launch this year. America’s roster of public companies had shrunk from the mid-1990s onward, but that trend has recently reversed, partly because of SPACs.
Their popularity has helped spark new Wall Street offerings.
Goldman Sachs Group Inc.
this year started offering clients set baskets of similar stocks to short, pitching them as a way to hedge SPAC exposure, people who have seen the offering said. Clients typically customize the baskets Goldman offers, which are thematic and sector-focused, such as on bitcoin and electric vehicles.
Kerrisdale Capital founder
Sahm Adrangi
started shorting postmerger SPAC companies earlier than most, with a public bet in November against the stock of frozen-food maker
Tattooed Chef Inc.,
which still trades above its price at that time. But the stock has fallen about 13% during the recent market slump.
“We saw these stocks go up a lot and now that people are de-risking, these highflying SPACs are coming down to earth,” Mr. Adrangi said.
—Amrith Ramkumar and Mike DeStefano contributed to this article.
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Grab Holdings Inc. is in talks to go public through a merger with a SPAC that could value the Southeast Asian ride-hailing startup at as much as $40 billion, making it by far the largest such deal on record.
The Singapore company is discussing a deal with a special-purpose acquisition company affiliated with Altimeter Capital Management LP that would value it at between $35 billion and $40 billion, according to people familiar with the matter. (Altimeter has two SPACS; it couldn’t be learned which one is in talks with Grab.)
As part of the deal, Grab would raise between $3 billion and $4 billion in a so-called PIPE, a funding round that typically accompanies a SPAC merger, the people said. That amount could still change as Grab and Altimeter will start meeting with mutual funds and other potential investors soon, some of the people said.
The parties could announce the deal in the next few weeks, though the talks could still fall apart and Grab could revert to an earlier plan to stage a traditional initial public offering on a U.S. exchange this year.
Should they move forward with a SPAC deal, it would be the high-water mark in a recent explosion of such transactions, in which an empty shell raises money in an IPO with plans to later find one or more companies to merge with. In some cases, the SPAC ends up with only a small sliver of the newly public target.
The vehicles have caught fire in the last couple of years, with everyone from former baseball player Alex Rodriguez to ex-House Speaker Paul Ryan getting in on the action. They have helped break a bottleneck between the private and public markets as companies that were reluctant to go public line up to combine with SPACs, which offer in many cases a speedier route to a listing without costs and disclosure limitations that accompany traditional IPOs.
The biggest SPAC deal to date is United Wholesale Mortgage’s roughly $16 billion combination with Gores Holdings IV Inc., announced in September. The biggest one so far this year is electric-vehicle company Lucid Motors Inc.’s agreement last month to merge with Michael Klein’s
Churchill Capital Corp.
IV, a deal valued at nearly $12 billion, according to Dealogic.
So far this year, a record $70 billion-plus has been raised for SPACs, which account for more than 70% of all public stock sales, according to Dealogic. A slew of companies are in talks for a SPAC merger or already have agreed to one, including office-sharing firm WeWork, online photo-book maker Shutterfly Inc. and online lender Social Finance Inc.
In addition to ride-hailing, Grab, which traces its roots back to 2011, delivers restaurant, grocery and other items and provides digital financial services to merchants.
Its backers include
SoftBank Group Corp.
,
Uber Technologies Inc.
and
Toyota Motor Corp.
It was last publicly valued at around $15 billion in an October 2019 fundraising round, according to PitchBook.
Its valuation is on the rise as public investors pile into other ride-hailing and food-delivery companies. Uber’s shares have jumped sharply in the past several months, while
DoorDash Inc.
went public in December at a valuation far in excess of where it had raised money privately. The restaurant-delivery company now has a market capitalization of nearly $47 billion.
Altimeter’s SPACs—Altimeter Growth Corp. and Altimeter Growth Corp. 2—raised $450 million and $400 million in October and January IPOs, respectively. Altimeter Capital, of Menlo Park, Calif., has around $16 billion under management and primarily invests in technology companies.
The firm has racked up a string of successful investments and was one of the main participants in a January round of funding
Roblox Corp.
raised ahead of its IPO at $45 a share. In its debut Wednesday, shares of the videogame platform traded more than 50% above that level and continued rising Thursday.
SoftBank, which invested through its Vision Fund, is also poised to win big on Grab, just as another of its bets proves to be a gigantic winner: The Japanese technology-investing giant has now made roughly $25 billion on paper on its $2.7 billion investment in South Korean e-commerce company
Coupang Inc.,
which soared 41% in its trading debut Thursday.
Private companies are flooding to special-purpose acquisition companies, or SPACs, to bypass the traditional IPO process and gain a public listing. WSJ explains why some critics say investing in these so-called blank-check companies isn’t worth the risk. Illustration: Zoë Soriano/WSJ
Write to Maureen Farrell at maureen.farrell@wsj.com
It was Jan. 4, and Chamath Palihapitiya was ready to tease another deal. “Shooters Shoot,” he tweeted to his followers, along with a GIF of Alec Baldwin berating weary salesmen to “Always Be Closing.” The retweets and likes for the “Glengarry Glen Ross” reference came fast and furious. “We’re ready,” one follower replied.
Three days later, when Mr. Palihapitiya announced his intention to take online lender Social Finance Inc. public via a “blank-check” company, Reddit message boards popular with the day-trading crowd lit up. One fan called it a “stock that you buy with hopes of transforming you into a millionaire”—even though SoFi did not expect to be profitable until 2023 and faced stiff competition.
Mr. Palihapitiya is the man of the market moment. The founder of tech-investing firm Social Capital Holdings Inc. has charmed Wall Street to raise billions of dollars to bring startups public. Amateur traders hang on his every word for clues about his next target—and for the insults he hurls at the high-finance elite. (Hedge funds, he said last April, deserved to get wiped out when coronavirus shutdowns devastated the economy.)
Wall Street has always had its rock stars.
Warren Buffett’s
carnival-like annual meeting, after all, is nicknamed “Woodstock for Capitalists.” But Mr. Palihapitiya, a former
Facebook Inc.
executive who now has 1.4 million
Twitter
followers, belongs to a new class of market influencers—social-media savants who’ve figured out how to take shots at the establishment while taking its money.
Mr. Palihapitiya, left, is a Sri Lankan immigrant to Canada whose family got by on welfare payments when he was a child. He moved to the U.S. during the dot-com era and eventually worked for Facebook Inc.
Photo:
Brian Ach/Getty Images for TechCrunch
No one has marshaled the twin forces reshaping markets—the blank-check boom and the retail-trading surge—quite like Mr. Palihapitiya. So far this year, as of Thursday, 225 companies that use money from initial public offerings to buy established businesses have raised roughly $71 billion—a figure that accounts for more than 70% of all public stock sales, according to Dealogic data. These outfits are known as “blank-check” firms or SPACs, an acronym that stands for special-purpose acquisition companies.
Ordinary investors, homebound and flush with cash, are fueling the surge. Social Capital raised $3.7 billion for five SPACs last year and filed confidentially to raise money for seven more, according to people familiar with the matter. They have helped make Mr. Palihapitiya a fortune—at least on paper. Their structure gives Mr. Palihapitiya the right to buy one-fifth of its outstanding shares at discount prices. That means he is sitting on a mountain of gains.
SoFi, a decade-old startup that made its name refinancing student loans, is his latest prize. He and his bankers pitched some of Wall Street’s top firms to participate in the deal, and Mr. Palihapitiya’s pull with stalwarts like money manager
BlackRock Inc.
was a big reason why the lender spurned other SPAC suitors and accepted Mr. Palihapitiya’s offer, according to people familiar with the matter.
He unveiled the $8.7 billion deal to the public on Jan. 7—on CNBC and on Twitter, naturally. Nearly 65 million shares of Mr. Palihapitiya’s
Social Capital Hedosophia Holdings Corp.
V changed hands that day, more than all but 22 U.S.-listed stocks, according to Dow Jones Market Data. IPOE, as it is known, closed up 58% at $19.14, even though the deal wasn’t final and the SPAC had no real assets yet.
Leaving Facebook
A Sri Lankan immigrant to Canada whose family got by on welfare payments when he was a child, Mr. Palihapitiya graduated from the University of Waterloo and worked at
Bank of Montreal
before moving to the U.S. during the dot-com era. He joined Facebook in 2007 to help grow its user base after stints at a venture-capital firm and America Online; he left in 2011 after he said Mark Zuckerberg denied his request to start a mobile-phone business and later emerged as a critic of his former employer.
He used the money he made at Facebook to fund a lifestyle of billionaire whimsy. He is a partial owner of the Golden State Warriors, a three-time contestant in the World Series of Poker and a cryptocurrency evangelist who said he paid $1.6 million in bitcoin for an undeveloped property in Lake Tahoe. “When BTC hits $100k, I’m going to buy @GoldmanSachs and rename it Chamathman Sachs,” he recently tweeted the weekend before he also publicly toyed with running for governor of California.
Chamath Palihapitiya, far left, is a partial owner of the NBA team Golden State Warriors and a three-time contestant in the World Series of Poker.
Photo:
Poker Go
Recently, Mr. Palihapitiya has been touting a plan to “fix climate change,” as he tweeted last month. He has approached potential investors about raising billions of dollars for a partnership with tech giants on climate efforts, people familiar with the matter said.
The year he left Facebook, he founded Social Capital with a mission of backing young startups that want to solve the world’s toughest problems. He gravitated to SPACs as a way to provide an alternative path to the public markets for startups that didn’t want to deal with the costs, hassle and uncertainty of a prolonged registration process.
Mr. Palihapitiya called the idea “IPO 2.0.” A SPAC avoids many of the rules governing a traditional IPO by executing a reverse merger between a corporate shell that raised the money and a private company that takes both the cash and the shell’s stock listing. Mr. Palihapitiya raised money for his first SPAC, Social Capital Hedosophia Holdings Corp., in 2017.
Not everyone was enamored with that first SPAC attempt. Tech companies, including
Slack Technologies Inc.
where Social Capital was an early investor, rebuffed Mr. Palihapitiya’s efforts to take them public via his SPAC, according to people familiar with the matter.
During this period Mr. Palihapitiya often frustrated his colleagues with his extended absences from the office and meetings. Those absences would occasionally cause him to miss fundraising meetings he had set up for himself and
Tony Bates,
a former Skype CEO who joined Social Capital to lead a growth-investing unit Mr. Palihapitiya launched in 2017, some of the people said.
Mr. Palihapitiya’s now ex-wife was a partner at Social Capital. While they were still married, he traveled with a new woman he was dating, according to people familiar with the matter. Partners left. Many other projects, including a credit-investing fund, fell by the wayside. Nonetheless, Social Capital was able to earn an annualized internal rate of return of 33% in its first eight years, it said in its most recent annual letter.
Mr. Palihapitiya got his big break as a SPAC investor from billionaire Richard Branson.
Mr. Palihapitiya, fourth from left, got his big break as a SPAC investor from billionaire Richard Branson, pictured here with a gavel in his hand.
Photo:
Richard Drew/Associated Press
Virgin Galactic Holdings Inc., Mr. Branson’s space-tourism company, called off a roughly $1 billion financing deal with Saudi Arabia’s Public Investment Fund in October 2018, after the Saudi government was linked to the disappearance of journalist Jamal Khashoggi.
Throughout 2019, Mr. Palihapitiya, Mr. Branson and their teams spent months negotiating a deal to take Virgin Galactic public through a SPAC merger. Over meetings in Park City, Utah, and at Mr. Branson’s Necker Island in the Caribbean, the two sides hammered out an arrangement that included a $100 million personal investment from Mr. Palihapitiya. The deal, which valued the company at roughly $2 billion, closed that fall.
Mr. Palihapitiya went viral in April 2020, just as he began fundraising for two additional SPACs. After appearing on CNBC to urge the government not to bail out wealthy investors in airlines and other hard-hit companies, he gained about 100,000 new followers on Twitter, according to social-media data company Captiv8 (Social Capital is an investor in Captiv8).
“We’re talking about—a hedge fund that serves a bunch of billionaire family offices? Who cares?” Mr. Palihapitiya said. “They don’t get to summer in the Hamptons? Who cares!”
The rant endeared him to amateur investors. “Through all the pain watching all of our portfolios go up in flames the past few weeks, this motherf—er came in and spoke for all us and really put a smile on my face,” one trader wrote in a post on Reddit’s WallStreetBets that was upvoted about 2,000 times.
Meanwhile, Mr. Palihapitiya was reeling in Wall Street investors. Before coronavirus lockdowns put an end to schmoozing, he hosted dinners and meetings to pitch his SPACs to hedge funds. When the SPACs made their market debut in April, hedge funds, the target of his flamethrowing, were the primary buyers.
Mr. Palihapitiya found big targets for two of his SPACs last fall, taking house-flipping startup Opendoor Labs Inc. public in a deal worth $6.3 billion and insurance-tech startup
Clover Health Investments Corp.
to market at a $4.4 billion valuation. Big institutional investors including BlackRock, Fidelity Investments and Healthcare of Ontario Pension Plan pumped hundreds of millions of dollars into the deals alongside Mr. Palihapitiya.
Mr. Palihapitiya took insurance-tech startup Clover Health Investments Corp. public via a SPAC at a $4.4 billion valuation. Here a nurse practitioner for Clover Health takes a patient’s blood pressure.
Photo:
John Taggart/Bloomberg News
“It was like this guy walks on water,” said Michael Edwards, deputy chief investment officer of Weiss Multi-Strategy Advisers LLC, who invested in Mr. Palihapitiya’s first SPAC. “Everything he does is going to be oversubscribed.”
In December and March, Mr. Palihapitiya sold 10 million shares of Virgin Galactic to free up more than $300 million for other ventures, according to securities filings. (He indirectly co-owns another 15.75 million shares through an investment vehicle). Mr. Palihapitiya and the other managers of the SPAC that took Opendoor public are sitting on paper gains of about $475 million on the warrants and discounted shares they received through the IPO of the SPAC, as well as for their participation in a related private placement of the SPAC shares, according to estimates based on an analysis of securities filings by Michael Ohlrogge, a professor at New York University’s law school.
Mr. Palihapitiya is separately looking to start a new family of SPACs for biotech companies, some of the people said.
How much Mr. Palihapitya earned or invested personally is more difficult to discern from the filings. He highlights that he invests hundreds of millions of dollars in private placements accompanying his SPAC deals, a decision that helped sway Opendoor and SoFi to take his offers, according to people familiar with the matter. But it is sometimes unclear how much of that money is coming directly from him or from investment firms he helps manage. The Securities and Exchange Commission proposed new guidance in December for SPAC sponsors to provide more disclosure around their compensation arrangements.
Hype Man
People who know and have worked with Mr. Palihapitiya describe him as a great salesman but a poor manager. When Social Capital decided to transition away from a traditional venture-capital firm in 2018 to be more of a holding company for startups, many employees learned they would be losing their jobs from a Medium post Mr. Palihapitiya published, a person familiar with the matter said.
Mr. Palihapitiya’s skills as a hype man, though, are particularly well-suited to the features of SPACs. Unlike in a traditional IPO, executives and sponsors of SPAC transactions can make projections about the company’s future revenue and profits. Because such deals are structured as mergers, SPAC sponsors don’t have to worry about restrictions on talking openly about a business before its shares start trading.
Mr. Palihapitiya takes advantage of these loopholes. He talks his deals up on Twitter, which his lawyers then submit to the Securities and Exchange Commission to comply with stock-solicitation rules. Mr. Palihapitiya arranged with CNBC extended airtime on the days his deals were announced and went through slides from his investor presentation, according to people familiar with the matter. CNBC declined to comment. YouTube and
Amazon.com Inc.’s
Twitch have also approached him about moving his deal announcements to their live-video streaming services, some of the people said.
Mr. Palihapitiya talks his deals up on Twitter, which his lawyers then submit to the Securities and Exchange Commission to comply with stock-solicitation rules. Mr. Palihapitiya also arranged with CNBC extended airtime on the days his deals were announced, according to people familiar with the matter.
Photo:
David Paul Morris/Bloomberg News
As many as 70% of the investors in Mr. Palihapitiya’s SPACs are everyday investors, these people said. He allocates a small percentage of the shares in the offerings of his SPACs for that crowd, with an eye toward getting his underwriters to increase their share above 50%, the people said.
Alex Cruzado watched each of Mr. Palihapitiya’s CNBC clips after seeing his April 2020 rant. The 20-year-old university student living in Geneva, Switzerland, bought shares in IPOE on the day of the SoFi announcement and later posted positive reviews of it on WallStreetBets.
“For companies like Opendoor and SoFi, the fact that he talks about it and makes a public announcement directs people in,” Mr. Cruzado said in an interview. “He’s really great at marketing… [but] there’s no significant value he adds but that branding and packaging,” Mr. Cruzado said.
During his Jan. 7 appearance on the business network to elaborate on SoFi’s merits, Mr. Palihapitiya offered his thoughts on how SPACs are helping to reduce wealth inequality by letting ordinary Americans get earlier access to future blue-chip companies.
“How do you do that? You’re not going to do that by owning
American Express.
Those companies are dormant legacy businesses. That game is over. You need companies like SoFi. You need companies like Opendoor, like Clover and others,” he said.
The moderators of WallStreetBets later banned its millions of members from posting about SPACs. “They are too easily pumped to allow on a subreddit of our size,” one wrote at the time.
Mr. Palihapitiya jumped into the fray in late January when traders, inspired by posts on WallStreetBets, bid up
GameStop Corp.
and other beaten-down stocks, dealing painful losses to hedge funds that had bet the stocks would fall.
“This is some insane, crazy, baller shit: r/wsb just ran over one of the most successful hedge funds around,” Mr. Palihapitiya tweeted, linking to a Wall Street Journal article about hedge fund Melvin Capital Management’s emergency cash infusion.
In solidarity, he bought GameStop call options. He closed his position the next day and donated the proceeds.
When Robinhood Markets Inc. and other online brokerages restricted trading in hot stocks, enraging investors, Mr. Palihapitiya went on the attack. Robinhood executives were “corporatist scumbags” who “should go to jail,” he said on his podcast, “All-In.”
On Jan. 28 and 29, he told his Twitter followers that he turned Robinhood down when the startup was raising money years ago—and that Robinhood was misleadingly monetizing user data. He suggested they ditch the app and use SoFi, instead. A Robinhood spokeswoman declined to comment.
Over each of the two days, shares of the SPAC merging with SoFi notched double-digit gains. Retail interest was so strong that Robinhood placed limits on users’ ability to purchase them lest the brokerage have to deposit additional collateral with its clearinghouse to cover the trades. Of the 51 stocks in which Robinhood restricted trading on Jan. 29, Mr. Palihapitiya was tied to four.
In early February, investors in Mr. Palihapitiya’s SPACs were reminded that there is risk in taking unproven companies public quickly. Short seller Hindenburg Research published a report on Feb. 4 accusing Clover Health of failing to tell investors about a Justice Department investigation into its practices and misleadingly marketing its services to the elderly. Hindenburg previously exposed irregularities at electric-truck startup
Nikola Corp.
after it merged with a SPAC.
“Chamath has done a masterful job marketing himself, capitalizing on the recent chaos with GameStop and WallStreetBets to align himself with “everyday” investors – but his public persona strikes us as the sugar that helps the poison go down,” Hindenburg wrote in the report.
Clover said the report was full of inaccuracies and mischaracterizations. In a response published last month on Medium, Clover’s CEO and president said Hindenburg framed its report around Mr. Palihapitiya “in order to sensationalize what is otherwise a rather underwhelming piece of research.” Mr. Palihapitiya took to—where else—Twitter to defend Clover, saying he and the company would have been happy to have met with Hindenburg: “Instead, they chose to take the cheap path of screaming into the ether.”
The tweet got more than 3,000 retweets and 17,000 likes, but, since then, Clover shares are down 44%.
—Amrith Ramkumar contributed to this article.
Write to Peter Rudegeair at Peter.Rudegeair@wsj.com and Maureen Farrell at maureen.farrell@wsj.com
Special-purpose acquisition companies—shell companies planning to merge with private firms to take them public—are rising more than 6% on average on their first day of trading in 2021, up from last year’s figure of 1.6%, according to University of Florida finance professor
Jay Ritter.
Before 2020, trading in SPACs was muted when they made their debut on public markets.
Now, shares of blank-check companies almost always go up. The last 140 SPACs to go public have either logged gains or ended flat on their opening day of trading, per a Dow Jones Market Data analysis of trading in blank-check companies through Thursday. One hundred and seventeen in a row have risen in their first week. The gains tend to continue, on average generating bigger returns going out to a few months.
The gains in companies that don’t yet have any underlying business underscore the wave of speculation in today’s markets. Merging with a SPAC has become a popular way for startups in buzzy sectors to go public and take advantage of investor enthusiasm for futuristic themes.
But lately, day traders are even putting money into SPACs before they have revealed what company they are buying. At that stage, they are pools of cash, so investors are wagering that the company will eventually complete an attractive deal.
Despite the risks, many are embracing the trade, underscoring how online investing platforms and social-media groups now send individuals flocking to new corners of markets, including shares of unprofitable companies such as GameStop and
AMC Entertainment Holdings Inc.
AMC 53.65%
That trend also is playing out in everything from shares of silver miners to SPACs, which were relatively rare before last year but are suddenly ubiquitous in finance.
“I would just have a bad case of FOMO if I wasn’t in SPACs,” said
Marco Prieto,
a 23-year-old real-estate agent living in Tucson, Ariz., referring to the fear of missing out that is driving many individuals to put money into markets.
He has a roughly $50,000 portfolio and about 60% of his holdings tied to blank-check companies. Some of his positions are early on in shell firms such as
Social Capital Hedosophia Holdings Corp. VI,
while others are based on rumors tied to possible deals by companies including
Churchill Capital Corp. IV.
Share-price performance of existing SPACs without deals announced*
Amount of cash
held by SPAC:
Biotechnology/Life science/Health care
Share-price performance of existing SPACs without deals announced*
Amount of cash
held by SPAC:
Biotechnology/Life science/Health care
Share-price performance of existing SPACs without deals announced*
Amount of cash
held by SPAC:
Biotechnology/Life science/Health care
Share-price performance of existing SPACs without deals announced*
Amount of cash
held by SPAC:
Biotechnology/Life science/Health care
Shares of that company have more than doubled since Bloomberg News reported on Jan. 11 that it is in talks to combine with electric-car firm Lucid Motors Inc. Trading got so frenzied that the SPAC put out a statement a week later saying it wouldn’t comment on the report and that it is always evaluating a number of possible deals. The stock has still been gyrating in the days since.
Investors betting on SPACs even before such reports is extraordinary because the underlying value of a blank-check firm before it pursues a deal is the amount of money it raises for a public listing. That figure is typically pegged at $10 a share. Still, it has become common for investors to buy at higher prices such as $11 or $12 to back big-name SPAC founders such as venture capitalist
Chamath Palihapitiya
and former Citigroup Inc. deal maker
Michael Klein.
In another sign blank-check firms are now frequently traded by individuals, several SPACs and companies that have merged with them recently joined GameStop and AMC on a list of stocks that had position limits on Robinhood Markets Inc., a popular brokerage for day traders. Those restricted included Mr. Klein’s Churchill Capital IV and a few of Mr. Palihapitiya’s SPACs in the
Social Capital Hedosophia
SPCE 2.74%
franchise.
The flood of money pouring in is a concern for skeptics who worry that everyday investors don’t understand the dangers of the trade. Even recent losses in a few hot companies such as electric-truck startup
Nikola Corp.
NKLA -0.39%
and health-care firm MultiPlan Inc. that merged with blank-check firms aren’t deterring investors because of the gains in other SPACs.
“It’s a tremendous amount of speculation,” said
Matt Simpson,
managing partner at Wealthspring Capital and a SPAC investor. His firm invests when SPACs go public or right after, then takes advantage when shares rise and typically sells before a deal is completed. He advertised an expected return from the strategy of 6% to clients, but last year it returned 20%.
Ninety-one SPACs have raised $25 billion so far this year, putting the market on track to shatter last year’s record of more than $80 billion, according to data provider SPAC Research.
Fast gains in the shares can result in big payoffs for their founders and the first investors in blank-check firms like Mr. Simpson. These earliest investors always have the right to withdraw their money before a deal goes through. The traders who get in later don’t have those same privileges, but that hasn’t been a deterring factor.
“If you don’t take a risk, there’s really no opportunity at all,” said
Chris Copeland,
a 36-year-old in upstate New York who started day trading on the platform Robinhood with his girlfriend last month. Roughly three-quarters of his portfolio is tied to SPACs such as
GS Acquisition Holdings Corp. II.
Mr. Prieto checks SPACs on his phone. ‘I would just have a bad case of FOMO if I wasn’t in SPACs,’ he says.
Photo:
Cassidy Araiza for The Wall Street Journal
Trading volumes in many popular blank-check firms have increased lately, an indication of investors’ heightened activity. That trend is even drawing attention from some SPAC founders.
“It worries me,” said veteran investor and SPAC creator
Bill Foley.
Trading volumes have surged in one of the SPACs founded by the owner of the Vegas Golden Knights hockey team, especially since it announced a $7.3 billion deal to take
Blackstone Group Inc.
BX 0.21%
-backed benefits provider Alight Solutions public last week.
One reason traders are getting into blank-check firms when they are just pools of cash is that the time it takes for a SPAC to unveil a deal has dwindled. Blank-check firms normally give themselves two years to acquire a private company, but many these days need only a few months.
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It also doesn’t take long for investor speculation about a blank-check firm’s acquisition to build, particularly because SPACs can indicate the sector in which they hope to complete a deal.
Excitement can be triggered by a SPAC pioneer like Mr. Palihapitiya, who sometimes hints to his more than 1.2 million Twitter followers when activity is coming. The former Facebook Inc. executive took space-tourism firm
Virgin Galactic Holdings Inc.
public in 2019 and last month reached a deal with Social Finance Inc.
Even though he invests in a number of blank-check firms other than his own—often when SPACs need to raise more money to complete deals—shares of his own companies can climb following such tweets. One example came Jan. 21, when one of his blank-check firms rose about 4% after Mr. Palihapitiya started a tweet by saying “I’m finalizing an investment in ‘???.’”
The SPAC has since given back those gains after no news about an acquisition came out and it was revealed that Mr. Palihapitiya’s investments were in companies unrelated to his own. He declined to comment.
Mr. Palihapitiya also has thrown himself into the frenzy of activity around GameStop trading, publicizing an options trade last week in the stock and taking profits on it.
Reports about possible mergers like those surrounding the Churchill Capital IV SPAC and a possible combination with Lucid Motors also quickly attract hordes of buyers. That blank-check firm is now owned by many individuals, including Messrs. Prieto, Copeland and
Jack Oundjian,
a 40-year-old who lives in Montreal.
“I’m very excited that we have a chance to be able to participate in what could be future unicorn companies,” or startups valued at $1 billion or more, Mr. Oundjian said. He said he views SPACs as long-term investments rather than fast trades, and holdings tied to the sector make up about 30% of his roughly $1.2 million portfolio.
Private companies are flooding to special-purpose acquisition companies, or SPACs, to bypass the traditional IPO process and gain a public listing. WSJ explains why some critics say investing in these so-called blank-check companies isn’t worth the risk. Illustration: Zoë Soriano/WSJ
Write to Amrith Ramkumar at amrith.ramkumar@wsj.com
