Following up on the last post, remember where the Great Debt Crisis hit hardest? It was at those CDO “investments” constructed from putting together a bunch of junk loans and then chopping them up into tranches ranging from AAA all the way to Z. It was a financial alchemist’s dream, transmuting horse doodoo into “gold”. Naturally, when the party stopped the “gold” immediately reverted back to its original state and suddenly defaulted.
History rhymes: in the last four years we have witnessed the astonishing popularity of SPACs, Special Purpose Acquisition Corporations, aka blank check companies. Investors give the organizer their money without any prior knowledge of where it is to be invested, except perhaps a very general guideline, eg healthcare. Sounds like the height of folly to me, but like PT Barnum said “there’s a sucker born every minute”.
Here’s how much money was raised in the last five years (see chart below). In 2021 alone people “invested” fifteen times more than just three years ago.
So, where’s the problem? For one, SPACs impose huge initial fees and expenses, on average 16% of the capital raised. Plus, they have ongoing running expenses - management, accounting, legal, etc. Figure another 5% annually, and that’s on the low side. Secondly, and crucially, if SPACs don’t invest the money (ie merge/acquire a company) within 18-24 months of listing, they are obligated to refund 100% of the money raised, usually plus interest.
It is currently becoming VERY difficult for SPACs to find suitable private companies to buy/merge with. SPAC investors must approve every acquisition - and if they don’t they are entitled to get their money back. Remember those huge fees and expenses? Does anyone think that SPAC organizers will just shrug their shoulders, open their own pocketbooks and send out money they have already spent? Fat chance…
IMHO there’s a lot of SPACe cadets in serious trouble out there….