20 ms·

The median return of 2022's SPAC mergers: -82%

206 points by pranshum 3y ago

canvascritic 3y ago
SPACs, in theory, democratized access to late-stage private markets, aiming to give retail investors an early seat at the table. but like many financial innovations, they're tools that can be wielded wisely or poorly. the high failure rate suggests a misalignment of incentives: founders and sponsors capture immediate liquidity, while long-term outcomes get obfuscated by the structure. I once had a chat with a founder who merged his startup with a SPAC. He mentioned that the allure wasn't just the capital but the perceived simplicity of the process, compared to a traditional IPO. But looking back, he felt that the rigorous scrutiny of the traditional path might have forced his team to address underlying business challenges they'd later face. in any event the real question here isn’t whether SPACs as a vehicle are intrinsically flawed, but if the market’s appetite for risk, combined with the allure of quick liquidity, blinded many to fundamentals during the 2020 bubble. With any financial innovation, there's often a cycle: initial excitement, over-extension, contraction, and then matured understanding. Perhaps we're in the contraction phase for spacs, but they might still find a place in a more judicious market
- LapsangGuzzler 3y ago
  Misalignment of incentives is such an understatement. > But looking back, he felt that the rigorous scrutiny of the traditional path might have forced his team to address underlying business challenges they'd later face. This is such a politically correct way of saying “we didn’t want to be scrutinized so we took the quick cash and ran instead.”
  - nocoiner 3y ago
    I think there’s a pretty good chance that’s not a very fair statement. OP’s friend was management, not the SPAC sponsor. He would have been subject to a lock-up on his stock following the de-SPAC transaction. There’s a very good chance that the stock price would have declined substantially during that period, so I’m not sure what cash there was for him to grab in the context of the de-SPAC transaction. To briefly be an executive of a failing public company doesn’t sound very enticing to me. At all. It sounds to me like OP’s friend’s company was overly eager to go public but with the benefit of hindsight realized that it wasn’t the right choice for the business.
    - lumost 3y ago
      There also may be some timing bias. The SPAC craze coincided with the apex of late stage money losing “startups”. Anecdotal evidence indicates that the private markets have done a major repricing of private firms in the last 2 years. It’s intrinsically difficult to value money losing firms. Apple was famously 90 days from bankruptcy, and Uber is now suddenly profitable. Sears is bankrupt, and GE is on the same path. There was certainly exuberance in 2021, and that likely lead to a number of bad deals.
      - gmd63 3y ago
        I don’t think a SPAC craze coinciding with exits for a bunch of overvalued startups is random
- paulgb 3y ago
  > SPACs, in theory, democratized access to late-stage private markets Working in finance made me extremely cynical about anything that claims to “democratize” finance. It’s a great idea, as you say, in theory; but in practice what gets branded as “democratization” is really selling retail investors on the table scraps that professionals have already picked over.
  - api 3y ago
    One of the things I've learned watching the cryptocurrency saga is this: It's hard to get money to be productive. It's hard to get a financial system to do anything other than gamble, pump and dump, scam, and make bubbles.
    - polygamous_bat 3y ago
      "Money" is as productive as the underlying system of production it sits on. You and I can invent foo and bar, with some creative financing sell it to each other for a million dollars, and have a million dollar net worth starting from zero while not producing anything of value. A lot of modern day financial "inventions" seem to be of this kind of "money productivity" with zero net value added to the world.
    - SkyMarshal 3y ago
      True. In general, we need maximal amount of investment and new credit/money creation going into innovation and productivity rather than financial asset speculation or consumption. If it mainly goes into consumption, we get inflation without growth. If it mainly goes into financial asset speculation, we get bubbles and crises. But if it mainly goes into innovation and productivity, we get steady and sustained economic growth without crises or inflation. The problem with cryptocurrency is that it is inherently separate from the real economy, and difficult to use for direct investment into real world innovation or productivity. Right now, new money creation in cryptocurrency goes mainly into digital asset speculation, resulting in periodic bubbles, and then failures of centralized crypto businesses like FTX, Celsius, etc.
    - Spooky23 3y ago
- candiddevmike 3y ago
  Democratized access is quite the silver lining. Retail investors got taken to the cleaners.
  - bloodyplonker22 3y ago
    It democratized access to losing money. Not only the VCs and PE could do it, now retail could.
- duped 3y ago
  A more cynical take is that financial innovation is roughly the task of figuring out how to leave retail investors holding the bag while insiders/financial service providers make off with a kings' ransom in commissions. In that sense a "matured understanding" is just regulation. And it seems a tall stretch to imagine SPACs reaching that when their sole existence is a loophole in regulation designed to protect retail investors from exactly these kinds of losses.
- aabhay 3y ago
  > SPACs, in theory, democratized access to late-stage private markets, aiming to give retail investors an early seat at the table. but like many financial innovations, they're tools that can be wielded wisely or poorly. This is highly misleading IMO. The democratization narrative is a complete marketing ploy — anyone that understands how the SPAC structure works would not call it “democratic” in any sense of the term. Participants in the SPAC fund and buyers of the public market equity are two completely different parties. For one the funders of the SPAC get their capital back (plus interest) if the SPAC fails to find a target. But even when they find one, the funders get many sweeteners over and above the resulting equity shares. In some cases there are minimum payouts and all kinds of other things that create a two tiered system. The SPAC “craze” can be boiled down to a few causes — overheated stock speculation that caused retail investors to put their money all over the board, and low interest rates that made this kind of risk free betting possible (the opportunity cost was very low when T-bills paid nothing). It was a way for companies to specifically and intentionally avoid public market regulations to sell to a perceived “dumb money” retail pool. There’s absolutely nothing democratic about it. Also why many of the companies using SPACs were “retail friendly” businesses like electric car companies that were perceived to be “exciting businesses” for retail buyers.
  - nocoiner 3y ago
    I think you’re conflating the SPAC sponsors and the owners of the public equity. The owners of the equity get their money back (plus interest) if the SPAC doesn’t find a target. The sponsors are out whatever money they put up to form the SPAC, take it public and search unsuccessfully for a target. The sponsors do typically have very rich upside if they find a deal - like, 20% of the post-merger company - but it’s not a risk-free thing for them. Don’t get me wrong, I think SPACs are fucking stupid and bad for retail investors and I would never want to be involved in one, but the pre-deal owners of shares of the SPAC are actually fairly decently protected (opt-out rights, money held in trust, not liable for SPAC expenses).
    - Lazare 3y ago
      I agree with your overall point, but I would note that US security regulation focuses heavily on disclosure as a mechanism to protect investors, and the owners of pre-deal SPAC shares are not well protected in that regard. It's good that they get to decide if they want their money back; it's bad they they're required to make that decision with so little information.
- pottertheotter 3y ago
  The funny thing is that this was actually the third SPAC boom. I cut my teeth on Wall Street in 2008 and they were all the rage then too: "SPACs have a distasteful reputation due to a number of scandals associated with them in the 1980s. But like Frankenstein arisen from the dead, they are back. Initially, when they first reappeared on the scene the major banks and M&A law firms refused to represent them. Morgan Joseph and Ladenburg Thalmann did the hard work of establishing a market." [1] Also, I don't think anyone launching a SPAC believes they are about democratizing access to certain deals. They're just another structure for raising funds for acquisitions. If the status quo is doing it through private equity firms, an alternative structure is search funds for the small deals and SPACs for the large deals. [1] https://archive.nytimes.com/dealbook.nytimes.com/2008/01/06/the-unseen-mergers-boom-spacs/ https://archive.nytimes.com/dealbook.nytimes.com/2008/01/06/...
- mitt_romney_12 3y ago
  > With any financial innovation, there's often a cycle: initial excitement, over-extension, contraction, and then matured understanding I'm a little more cynical, I think the cycle is: a new financial invention comes out, greed causes people to people to pump money into it, eventually the bubble pops or regulators step in. We've seen it time and time again: the dot com bubble, the subprime mortgage bubble, SPACs, and now/soon (IMO) with PE. My question is how many times this has to happen before we stop viewing it as an isolated with specific product and start to see it as a system issue with our financial system.
  - wnc3141 3y ago
    I'm curious what your reasoning on PE is. I know the space is struggling, (I'm not exactly rooting for them), but could you give a little context on what bubble and potential regulation is called for?
- Lazare 3y ago
  > SPACs, in theory, democratized access to late-stage private markets, aiming to give retail investors an early seat at the table. I question how that's even true in theory. A SPAC is an elaborate (and expensive) mechanism to bring a private company public with less disclosure; even if it works as designed, you're not letting retail investors invest in early stage companies. > He mentioned that the allure wasn't just the capital but the perceived simplicity of the process, compared to a traditional IPO. There's very little simple about a SPAC, which suggests the founder may not have understood them as much as he thought he did. Perhaps he meant easier? Also, I mean, there is a simple process for going public that does at least partially democratize the process: Direct listings. I've always found it fascinating how unpopular they are.
- baby 3y ago
  SPACs really are hacky legal loophole right?
- ethbr1 3y ago
  https://en.m.wikipedia.org/wiki/The_Market_for_Lemons https://en.m.wikipedia.org/wiki/The_Market_for_Lemons If there exist two pathways: 1. Regulated, standardized 2. Less regulated alternative Which sort of companies are going to dominate in #2? It's not going to be the ones that could have gone with #1, but decided not to for reasons. It's going to be a lot of companies that couldn't go with #1. Which will drag down the median of #2, which will increase the cost of using it (because everyone will assume you're a scam by default), which will decrease its attractiveness and cause even more companies who can to pursue #1, GOTO 10.
  - fsckboy 3y ago
    um, lemon markets don't get fixed by simple regulation. A seller has a motivation to sell which the buyer doesn't have direct access to: "I'm moving, need to sell my car"; "I get a new car every year, sell my old one"; "this car has tons of problems". The buyer's motivation is clear, "I want a good car for the price". Since the market is a mix of lemon cars and good cars, the prices are somewhere in between. If the prices for good cars reflect lemons, the guy selling will say "I can't get enough for my car, I'll buy a new car every two years." The guys with the lemons still want to sell their cars. Now there are fewer good cars in the pool, and prices drop even more. Now the guy who is moving will try to find somebody in his family he can sell it too, but the lemon guys still want to sell theirs. This is why a brand new car loses so much value the minute you drive it off the lot. It's not a problem that can be completely solved with regulation; although some of the large players, like rental car companies, can be more easily regulated to not roll their odometers back, keep repair records, etc. However, they still get caught cheating.
    - ethbr1 3y ago
      Lemon markets can be fixed by regulation, because regulation effectively sets a floor to cheating. And it's cheating (or buyer perception of cheating) that increases the discount the lemon market takes to true value, which leads to lemons dominating non-lemons in that market. The more you can do to keep lemons out of a market via regulation, the less of a discount the buyer will demand relative to true value.
- umeshunni 3y ago
  SPACs also suffer from an adverse selection problem. The people who self select to do a SPAC because they have low tolerance for rigorous scrutiny are more likely to fail when the tides go out.
- DanHulton 3y ago
  Whenever I see the term "democratizing access," my spidey-sense starts to tingle and I get a strong suspicion that I'm about to encounter something kinda-to-very skeezy that _really_ needs a good "power to the people" cover story in order to be accepted. SPACs, it would seem, are not an exception.
- datadrivenangel 3y ago
  Same issue with IPOs. The sponsoring banks can earn nice fees even if the stock does poorly.
throwaway4736 3y ago
Yeah, you all can sit here and make jokes on HN, but you’re not the man in the arena.
- riffic 3y ago
  the arena is stupid and it's fair to point that out.
- danbolt 3y ago
  I mean, the man knew he was going to relinquish his joke privileges when he decided to try his luck in the arena. Seems like a fair tradeoff to me!
- fullshark 3y ago
  Such an honorable enterprise, fighting to secure exit liquidity from dud investments.
- AlbertCory 3y ago
  When the man in the arena is Jordan Belfort: yes, jokes are appropriate.
- cinntaile 3y ago
  This is a reference to https://nitter.net/chamath/status/1693992134796603477 https://nitter.net/chamath/status/1693992134796603477 I believe.
- SkyMarshal 3y ago
  I assume this is a tongue-in-cheek reference to Chamath’s latest drama: https://twitter.com/chamath/status/1693992134796603477 https://twitter.com/chamath/status/1693992134796603477
  - throwaway4736 3y ago
    Yes.
javajosh 3y ago
I'm new to the term SPAC and had to look it up. https://www.investopedia.com/terms/s/spac.asp https://www.investopedia.com/terms/s/spac.asp Based on the definition, is it proper to call it a "merger"? It seems more like what SPACs do is "acquire".
- epgui 3y ago
  In practice and in effect, it's more like a lightweight IPO that skirts around the rules meant to protect investors. Like an IPO, but way riskier. Technically there is a merger that does happen, but... it really is a technicality.
yieldcrv 3y ago
> So, eh, awkward, but maybe this SPAC stuff destroyed more value than it created? The money didn’t disappear and those shares created were never worth anything.
quickthrower2 3y ago
Median? Who cares. $1 bet. Roll a dice. If you get 1,2 you get zero Otherwise $1.3 Median return is 30% plus prinicpal.
- yellowstuff 3y ago
  I’m a quant. If all you care about is the realized return of a equal-weighted portfolio than sure, just look at mean return. If you’re trying to understand a strategy in depth you’ll want to look at the entire distribution of hypothetical returns, precisely because financial returns are fat-tailed and portfolio returns are often driven by outliers. I don’t know about SPACs, but for common stock often the outlier returns are in small illiquid stocks where you couldn’t take a large position.
  - quickthrower2 3y ago
    Sure. What I mean is there is only so much space in a headline. Give one stat to report the success, the weighted mean is best. It represents the laymens idea if what did I get out if I put $1 across all of it. Imagine a headline about the median SPY company growth in 2022. That number isn’t how much the SPY went up.
    - affinepplan 3y ago
      > That number isn’t how much the SPY went up neither is the return from putting $1 across all of SPY
      - quickthrower2 3y ago
        Unless you mean I omitted the technicalities of re-balancing, it is: https://www.investopedia.com/ask/answers/05/sp500calculation.asp https://www.investopedia.com/ask/answers/05/sp500calculation...
woleium 3y ago
Inverse SPAC ETF when?
- maxbond 3y ago
  Looks like it was called SOGU and run by AXS. Seems to have died in June of this year (based on the observation that it's price chart ends). I didn't find documentation as to why, there's bits and pieces like old prospectuses on AXS's website but they've taken down it's page. I haven't found a notice about wrapping up the fund, and I haven't found anything on Edgar. Their last annual report (per archive.org) seems to be a broken PDF. But I didn't try that hard, I'm sure the documentation must exist somewhere.
systemvoltage 3y ago
SPAC Boom was coincident with money supply and one the most inflationary times. Median return of 2022 SPAC mergers was -82%, but so was pretty much all high P/E ratio companies. Cloudflare is down -72% from ATH in 2022. Defending against the inevitable strawman: I am not saying anything about whether SPACs are good/bad investments. But, in order to show the full strength of their "badness", the author needs to tell us more about the overall market and contrast that with SPACs.
hn_throwaway_99 3y ago
I'm always somewhat amazed that Chamath Palihapitiya doesn't have a much worse reputation: 1. My understanding is that he was the primary initial architect of "A/B testing for engagement" at Facebook that turned social media into a tribalistic, outrage generating machine (nothing engages like hate), and that the rest of SV essentially copied. I think this trajectory would have happened regardless, but he was first, so to speak. 2. He was the primary booster of selling the shit sandwiches known as SPACs as filet mignon. I'm sure he made out, any downstream investors not so much.
- throwaway4736 3y ago
  He was also a huge bully at Facebook —- it’s well known that everyone strongly disliked him personally —- and his behavior at SocialCapital was so bizarre that every other partner in the firm quit.
  - nwienert 3y ago
    [flagged]
    - ProAm 3y ago
      Who else? Im curious
    - hn_throwaway_99 3y ago
      Your comment pretty much highlights my point. I've seen Chamath interviewed talking about the evils of Silicon Valley and social media. Meanwhile, I'm like "Queen, please, you were a primary architect of it, and it made you wildly rich!" Why isn't he challenged more often when he talks about the negative impacts of stuff he created?
    - majormajor 3y ago
      But none of the criticism here is about what he said it's about what he did which is 99.9999% overlapping with standard "fuck you got mine" neocon/liberal SV/Wall Street status quo.
fomine3 3y ago
I don't understand that why only 1% publicly available stock is allowed in the market. Scam. https://news.ycombinator.com/item?id=37148125 https://news.ycombinator.com/item?id=37148125
pavon 3y ago
For some context, looking at traditional IPOs during the same year[1], the median return was 3.3%, the mean -22%. Like SPACs there were a couple outlier that gave high returns. Around 45% of IPOs gave small positive returns, while only 4% of SPACs did. Around 35% of IPOs lost half their value or more, while 80% of SPACs did. [1] https://stockanalysis.com/ipos/2022/ https://stockanalysis.com/ipos/2022/
- epgui 3y ago
  Much needed perspective! (it's still not a great track record, but it feels more proportional)
lvl102 3y ago
Wall Street banks made a lot of money off of that craze and that’s really the reason number one the Fed didn’t tighten its policy when inflation was flashing red. Never trust the Fed. They merely exist to facilitate monetary policies for Wall Street banks.
- calgarymicro 3y ago
  If the sole purpose of the Fed is to facilitate easy monetary policy for banks then it sure is odd they're continuing to hike interest rates even though most banks are massively underwater on their bond portfolios (some to catastrophic effect) .
- duped 3y ago
  The Fed literally killed multiple banks not six months ago.
olliej 3y ago
Isn't the goal of an SPAC to basically circumvent the IPO auditing and reporting rules to allow them to scam purchasers^w^w "streamline listing the stock"?
- jonathankoren 3y ago
  I always figured it was "We're old, and need money, but can't raise a round." If it was a viable business, just do an IPO.
- paxys 3y ago
  Yes. People will try and come up with long winded justifications for them but there's really nothing deeper going on. Failing companies want to dump shares on retail investors but don't want to go through IPO due diligence and reporting, hence SPACs.
NotYourLawyer 3y ago
People don’t like IPOs because the share price often pops immediately, and you feel like you’ve left money on the table. SPACs have 100% solved that problem.
gramie 3y ago
I'm sure that they made tidy profits for the executives involved, though.
eigenvalue 3y ago
This is one of those things that was just totally obvious to professional market participants while it was happening. I was working as an investment analyst at a huge ($10b+ AUM) hedge fund at the time and couldn’t believe the insanity and greed that was being displayed daily by SPAC sponsors and “investors”. Often the way this game worked was that if you were a large institutional investor who could be relied on to take a large allocation of the shares, you got special treatment and then could dump your shares on unsuspecting (and highly irrational) retail investors, at least while the insanity continued. It was fascinating to see how a bunch of professionals, who should have known better, each of whom were acting rationally (if not exactly ethically, although it was basically all totally legal), could nevertheless result in totally crazy malinvestment and capital destruction. Of course, it was all possible only because of uninformed retail holding the bag of worthless companies like Virgin Galactic, or real companies that were valued at silly levels because they were SPACs. It was amazing too just how many times the big SPAC sponsors (like Chamath, but also Alec Gores, Michael Klein, etc.) "went back to the well" to do the same thing again and again. The most egregious of all of these that I'm aware of is David Hamamoto, who did the SPAC deal for Lordstown Motors, which was basically an outright fraud (I shorted this one to the bottom in size at the time). Sadly, I doubt any of the people responsible for these huge losses by the public will ever be held accountable in any way, nor will the legions of professionals (lawyers, accountants, investment bankers, etc.) who enriched themselves while facilitating what they must have known were guaranteed duds for whomever would be left holding the bag (i.e., stupid retail investors losing their meager life savings.)
- CraigRo 3y ago
  I had trouble believing that these things were even legal given that we'd made the same mistakes during the 1920s. The very idea of 'let's form a company to get a bunch of money but we're not going to tell you what for' is entirely reminiscent of the south seas bubble language from the 1720s. I'm glad the SEC finally effectively killed these things.
  - eigenvalue 3y ago
    Yes, just like the joint stock company that someone attempted to float during the time of the South Sea bubble that was described in the Madness of Crowds as being “For carrying-on an undertaking of great advantage but no-one to know what it is.” That always made me laugh. Crazy then and crazy now.
d136o 3y ago
The suckers aren’t just investors, but also employees who work at companies that hinted/promised liquidity via one of these transactions. I didn’t work at a company that failed to ipo via spac, but I almost did and although every technical interviewer felt earnest, something felt off about their lack of detail around business and the equity part of the comp. Too much of it felt like hot air and I went elsewhere. This was two years ago, and indeed some BS press release from a year ago says their “deal” fell apart. Seemingly reputable investors too, wtf. Keep your BS detectors on at all times.
geuis 3y ago
Yup. I generally enjoy some of the topics the guys on that podcast cover, but any time Chamath is on it's fairly cringey. I've seen enough scammy crap in my life, and unfortunately was part of briefly earlier in life, that when things like SPACs pop up the scams are fairly obvious. If anyone tries to sell you on something that doesn't make sense even after you spend some time researching it, it's probably in the scam bucket.

206 points by pranshum 3y ago

SPACs, in theory, democratized access to late-stage private markets, aiming to give retail investors an early seat at the table. but like many financial innovations, they're tools that can be wielded wisely or poorly. the high failure rate suggests a misalignment of incentives: founders and sponsors capture immediate liquidity, while long-term outcomes get obfuscated by the structure. I once had a chat with a founder who merged his startup with a SPAC. He mentioned that the allure wasn't just the capital but the perceived simplicity of the process, compared to a traditional IPO. But looking back, he felt that the rigorous scrutiny of the traditional path might have forced his team to address underlying business challenges they'd later face. in any event the real question here isn’t whether SPACs as a vehicle are intrinsically flawed, but if the market’s appetite for risk, combined with the allure of quick liquidity, blinded many to fundamentals during the 2020 bubble. With any financial innovation, there's often a cycle: initial excitement, over-extension, contraction, and then matured understanding. Perhaps we're in the contraction phase for spacs, but they might still find a place in a more judicious market

LapsangGuzzler 3y ago
Misalignment of incentives is such an understatement. > But looking back, he felt that the rigorous scrutiny of the traditional path might have forced his team to address underlying business challenges they'd later face. This is such a politically correct way of saying “we didn’t want to be scrutinized so we took the quick cash and ran instead.”
- nocoiner 3y ago
  I think there’s a pretty good chance that’s not a very fair statement. OP’s friend was management, not the SPAC sponsor. He would have been subject to a lock-up on his stock following the de-SPAC transaction. There’s a very good chance that the stock price would have declined substantially during that period, so I’m not sure what cash there was for him to grab in the context of the de-SPAC transaction. To briefly be an executive of a failing public company doesn’t sound very enticing to me. At all. It sounds to me like OP’s friend’s company was overly eager to go public but with the benefit of hindsight realized that it wasn’t the right choice for the business.
  - lumost 3y ago
    There also may be some timing bias. The SPAC craze coincided with the apex of late stage money losing “startups”. Anecdotal evidence indicates that the private markets have done a major repricing of private firms in the last 2 years. It’s intrinsically difficult to value money losing firms. Apple was famously 90 days from bankruptcy, and Uber is now suddenly profitable. Sears is bankrupt, and GE is on the same path. There was certainly exuberance in 2021, and that likely lead to a number of bad deals.
    - gmd63 3y ago
      I don’t think a SPAC craze coinciding with exits for a bunch of overvalued startups is random
paulgb 3y ago
> SPACs, in theory, democratized access to late-stage private markets Working in finance made me extremely cynical about anything that claims to “democratize” finance. It’s a great idea, as you say, in theory; but in practice what gets branded as “democratization” is really selling retail investors on the table scraps that professionals have already picked over.
- api 3y ago
  One of the things I've learned watching the cryptocurrency saga is this: It's hard to get money to be productive. It's hard to get a financial system to do anything other than gamble, pump and dump, scam, and make bubbles.
  - polygamous_bat 3y ago
    "Money" is as productive as the underlying system of production it sits on. You and I can invent foo and bar, with some creative financing sell it to each other for a million dollars, and have a million dollar net worth starting from zero while not producing anything of value. A lot of modern day financial "inventions" seem to be of this kind of "money productivity" with zero net value added to the world.
  - SkyMarshal 3y ago
    True. In general, we need maximal amount of investment and new credit/money creation going into innovation and productivity rather than financial asset speculation or consumption. If it mainly goes into consumption, we get inflation without growth. If it mainly goes into financial asset speculation, we get bubbles and crises. But if it mainly goes into innovation and productivity, we get steady and sustained economic growth without crises or inflation. The problem with cryptocurrency is that it is inherently separate from the real economy, and difficult to use for direct investment into real world innovation or productivity. Right now, new money creation in cryptocurrency goes mainly into digital asset speculation, resulting in periodic bubbles, and then failures of centralized crypto businesses like FTX, Celsius, etc.
  - Spooky23 3y ago
candiddevmike 3y ago
Democratized access is quite the silver lining. Retail investors got taken to the cleaners.
- bloodyplonker22 3y ago
  It democratized access to losing money. Not only the VCs and PE could do it, now retail could.
duped 3y ago
A more cynical take is that financial innovation is roughly the task of figuring out how to leave retail investors holding the bag while insiders/financial service providers make off with a kings' ransom in commissions. In that sense a "matured understanding" is just regulation. And it seems a tall stretch to imagine SPACs reaching that when their sole existence is a loophole in regulation designed to protect retail investors from exactly these kinds of losses.
aabhay 3y ago
> SPACs, in theory, democratized access to late-stage private markets, aiming to give retail investors an early seat at the table. but like many financial innovations, they're tools that can be wielded wisely or poorly. This is highly misleading IMO. The democratization narrative is a complete marketing ploy — anyone that understands how the SPAC structure works would not call it “democratic” in any sense of the term. Participants in the SPAC fund and buyers of the public market equity are two completely different parties. For one the funders of the SPAC get their capital back (plus interest) if the SPAC fails to find a target. But even when they find one, the funders get many sweeteners over and above the resulting equity shares. In some cases there are minimum payouts and all kinds of other things that create a two tiered system. The SPAC “craze” can be boiled down to a few causes — overheated stock speculation that caused retail investors to put their money all over the board, and low interest rates that made this kind of risk free betting possible (the opportunity cost was very low when T-bills paid nothing). It was a way for companies to specifically and intentionally avoid public market regulations to sell to a perceived “dumb money” retail pool. There’s absolutely nothing democratic about it. Also why many of the companies using SPACs were “retail friendly” businesses like electric car companies that were perceived to be “exciting businesses” for retail buyers.
- nocoiner 3y ago
  I think you’re conflating the SPAC sponsors and the owners of the public equity. The owners of the equity get their money back (plus interest) if the SPAC doesn’t find a target. The sponsors are out whatever money they put up to form the SPAC, take it public and search unsuccessfully for a target. The sponsors do typically have very rich upside if they find a deal - like, 20% of the post-merger company - but it’s not a risk-free thing for them. Don’t get me wrong, I think SPACs are fucking stupid and bad for retail investors and I would never want to be involved in one, but the pre-deal owners of shares of the SPAC are actually fairly decently protected (opt-out rights, money held in trust, not liable for SPAC expenses).
  - Lazare 3y ago
    I agree with your overall point, but I would note that US security regulation focuses heavily on disclosure as a mechanism to protect investors, and the owners of pre-deal SPAC shares are not well protected in that regard. It's good that they get to decide if they want their money back; it's bad they they're required to make that decision with so little information.
pottertheotter 3y ago
The funny thing is that this was actually the third SPAC boom. I cut my teeth on Wall Street in 2008 and they were all the rage then too: "SPACs have a distasteful reputation due to a number of scandals associated with them in the 1980s. But like Frankenstein arisen from the dead, they are back. Initially, when they first reappeared on the scene the major banks and M&A law firms refused to represent them. Morgan Joseph and Ladenburg Thalmann did the hard work of establishing a market." [1] Also, I don't think anyone launching a SPAC believes they are about democratizing access to certain deals. They're just another structure for raising funds for acquisitions. If the status quo is doing it through private equity firms, an alternative structure is search funds for the small deals and SPACs for the large deals. [1] https://archive.nytimes.com/dealbook.nytimes.com/2008/01/06/the-unseen-mergers-boom-spacs/ https://archive.nytimes.com/dealbook.nytimes.com/2008/01/06/...
mitt_romney_12 3y ago
> With any financial innovation, there's often a cycle: initial excitement, over-extension, contraction, and then matured understanding I'm a little more cynical, I think the cycle is: a new financial invention comes out, greed causes people to people to pump money into it, eventually the bubble pops or regulators step in. We've seen it time and time again: the dot com bubble, the subprime mortgage bubble, SPACs, and now/soon (IMO) with PE. My question is how many times this has to happen before we stop viewing it as an isolated with specific product and start to see it as a system issue with our financial system.
- wnc3141 3y ago
  I'm curious what your reasoning on PE is. I know the space is struggling, (I'm not exactly rooting for them), but could you give a little context on what bubble and potential regulation is called for?
Lazare 3y ago
> SPACs, in theory, democratized access to late-stage private markets, aiming to give retail investors an early seat at the table. I question how that's even true in theory. A SPAC is an elaborate (and expensive) mechanism to bring a private company public with less disclosure; even if it works as designed, you're not letting retail investors invest in early stage companies. > He mentioned that the allure wasn't just the capital but the perceived simplicity of the process, compared to a traditional IPO. There's very little simple about a SPAC, which suggests the founder may not have understood them as much as he thought he did. Perhaps he meant easier? Also, I mean, there is a simple process for going public that does at least partially democratize the process: Direct listings. I've always found it fascinating how unpopular they are.
baby 3y ago
SPACs really are hacky legal loophole right?
ethbr1 3y ago
https://en.m.wikipedia.org/wiki/The_Market_for_Lemons https://en.m.wikipedia.org/wiki/The_Market_for_Lemons If there exist two pathways: 1. Regulated, standardized 2. Less regulated alternative Which sort of companies are going to dominate in #2? It's not going to be the ones that could have gone with #1, but decided not to for reasons. It's going to be a lot of companies that couldn't go with #1. Which will drag down the median of #2, which will increase the cost of using it (because everyone will assume you're a scam by default), which will decrease its attractiveness and cause even more companies who can to pursue #1, GOTO 10.
- fsckboy 3y ago
  um, lemon markets don't get fixed by simple regulation. A seller has a motivation to sell which the buyer doesn't have direct access to: "I'm moving, need to sell my car"; "I get a new car every year, sell my old one"; "this car has tons of problems". The buyer's motivation is clear, "I want a good car for the price". Since the market is a mix of lemon cars and good cars, the prices are somewhere in between. If the prices for good cars reflect lemons, the guy selling will say "I can't get enough for my car, I'll buy a new car every two years." The guys with the lemons still want to sell their cars. Now there are fewer good cars in the pool, and prices drop even more. Now the guy who is moving will try to find somebody in his family he can sell it too, but the lemon guys still want to sell theirs. This is why a brand new car loses so much value the minute you drive it off the lot. It's not a problem that can be completely solved with regulation; although some of the large players, like rental car companies, can be more easily regulated to not roll their odometers back, keep repair records, etc. However, they still get caught cheating.
  - ethbr1 3y ago
    Lemon markets can be fixed by regulation, because regulation effectively sets a floor to cheating. And it's cheating (or buyer perception of cheating) that increases the discount the lemon market takes to true value, which leads to lemons dominating non-lemons in that market. The more you can do to keep lemons out of a market via regulation, the less of a discount the buyer will demand relative to true value.
umeshunni 3y ago
SPACs also suffer from an adverse selection problem. The people who self select to do a SPAC because they have low tolerance for rigorous scrutiny are more likely to fail when the tides go out.
DanHulton 3y ago
Whenever I see the term "democratizing access," my spidey-sense starts to tingle and I get a strong suspicion that I'm about to encounter something kinda-to-very skeezy that _really_ needs a good "power to the people" cover story in order to be accepted. SPACs, it would seem, are not an exception.
datadrivenangel 3y ago
Same issue with IPOs. The sponsoring banks can earn nice fees even if the stock does poorly.

throwaway4736 3y ago

Yeah, you all can sit here and make jokes on HN, but you’re not the man in the arena.

riffic 3y ago
the arena is stupid and it's fair to point that out.
danbolt 3y ago
I mean, the man knew he was going to relinquish his joke privileges when he decided to try his luck in the arena. Seems like a fair tradeoff to me!
fullshark 3y ago
Such an honorable enterprise, fighting to secure exit liquidity from dud investments.
AlbertCory 3y ago
When the man in the arena is Jordan Belfort: yes, jokes are appropriate.
cinntaile 3y ago
This is a reference to https://nitter.net/chamath/status/1693992134796603477 https://nitter.net/chamath/status/1693992134796603477 I believe.
SkyMarshal 3y ago
I assume this is a tongue-in-cheek reference to Chamath’s latest drama: https://twitter.com/chamath/status/1693992134796603477 https://twitter.com/chamath/status/1693992134796603477
- throwaway4736 3y ago
  Yes.

javajosh 3y ago

I'm new to the term SPAC and had to look it up. https://www.investopedia.com/terms/s/spac.asp https://www.investopedia.com/terms/s/spac.asp Based on the definition, is it proper to call it a "merger"? It seems more like what SPACs do is "acquire".

epgui 3y ago
In practice and in effect, it's more like a lightweight IPO that skirts around the rules meant to protect investors. Like an IPO, but way riskier. Technically there is a merger that does happen, but... it really is a technicality.

yieldcrv 3y ago

> So, eh, awkward, but maybe this SPAC stuff destroyed more value than it created? The money didn’t disappear and those shares created were never worth anything.

quickthrower2 3y ago

Median? Who cares. $1 bet. Roll a dice. If you get 1,2 you get zero Otherwise $1.3 Median return is 30% plus prinicpal.

yellowstuff 3y ago
I’m a quant. If all you care about is the realized return of a equal-weighted portfolio than sure, just look at mean return. If you’re trying to understand a strategy in depth you’ll want to look at the entire distribution of hypothetical returns, precisely because financial returns are fat-tailed and portfolio returns are often driven by outliers. I don’t know about SPACs, but for common stock often the outlier returns are in small illiquid stocks where you couldn’t take a large position.
- quickthrower2 3y ago
  Sure. What I mean is there is only so much space in a headline. Give one stat to report the success, the weighted mean is best. It represents the laymens idea if what did I get out if I put $1 across all of it. Imagine a headline about the median SPY company growth in 2022. That number isn’t how much the SPY went up.
  - affinepplan 3y ago
    > That number isn’t how much the SPY went up neither is the return from putting $1 across all of SPY
    - quickthrower2 3y ago
      Unless you mean I omitted the technicalities of re-balancing, it is: https://www.investopedia.com/ask/answers/05/sp500calculation.asp https://www.investopedia.com/ask/answers/05/sp500calculation...

woleium 3y ago

Inverse SPAC ETF when?

maxbond 3y ago
Looks like it was called SOGU and run by AXS. Seems to have died in June of this year (based on the observation that it's price chart ends). I didn't find documentation as to why, there's bits and pieces like old prospectuses on AXS's website but they've taken down it's page. I haven't found a notice about wrapping up the fund, and I haven't found anything on Edgar. Their last annual report (per archive.org) seems to be a broken PDF. But I didn't try that hard, I'm sure the documentation must exist somewhere.

systemvoltage 3y ago

SPAC Boom was coincident with money supply and one the most inflationary times. Median return of 2022 SPAC mergers was -82%, but so was pretty much all high P/E ratio companies. Cloudflare is down -72% from ATH in 2022. Defending against the inevitable strawman: I am not saying anything about whether SPACs are good/bad investments. But, in order to show the full strength of their "badness", the author needs to tell us more about the overall market and contrast that with SPACs.

hn_throwaway_99 3y ago

I'm always somewhat amazed that Chamath Palihapitiya doesn't have a much worse reputation: 1. My understanding is that he was the primary initial architect of "A/B testing for engagement" at Facebook that turned social media into a tribalistic, outrage generating machine (nothing engages like hate), and that the rest of SV essentially copied. I think this trajectory would have happened regardless, but he was first, so to speak. 2. He was the primary booster of selling the shit sandwiches known as SPACs as filet mignon. I'm sure he made out, any downstream investors not so much.

throwaway4736 3y ago
He was also a huge bully at Facebook —- it’s well known that everyone strongly disliked him personally —- and his behavior at SocialCapital was so bizarre that every other partner in the firm quit.
- nwienert 3y ago
  [flagged]
  - ProAm 3y ago
    Who else? Im curious
  - hn_throwaway_99 3y ago
    Your comment pretty much highlights my point. I've seen Chamath interviewed talking about the evils of Silicon Valley and social media. Meanwhile, I'm like "Queen, please, you were a primary architect of it, and it made you wildly rich!" Why isn't he challenged more often when he talks about the negative impacts of stuff he created?
  - majormajor 3y ago
    But none of the criticism here is about what he said it's about what he did which is 99.9999% overlapping with standard "fuck you got mine" neocon/liberal SV/Wall Street status quo.

fomine3 3y ago

I don't understand that why only 1% publicly available stock is allowed in the market. Scam. https://news.ycombinator.com/item?id=37148125 https://news.ycombinator.com/item?id=37148125

pavon 3y ago

For some context, looking at traditional IPOs during the same year[1], the median return was 3.3%, the mean -22%. Like SPACs there were a couple outlier that gave high returns. Around 45% of IPOs gave small positive returns, while only 4% of SPACs did. Around 35% of IPOs lost half their value or more, while 80% of SPACs did. [1] https://stockanalysis.com/ipos/2022/ https://stockanalysis.com/ipos/2022/

epgui 3y ago
Much needed perspective! (it's still not a great track record, but it feels more proportional)

lvl102 3y ago

Wall Street banks made a lot of money off of that craze and that’s really the reason number one the Fed didn’t tighten its policy when inflation was flashing red. Never trust the Fed. They merely exist to facilitate monetary policies for Wall Street banks.

calgarymicro 3y ago
If the sole purpose of the Fed is to facilitate easy monetary policy for banks then it sure is odd they're continuing to hike interest rates even though most banks are massively underwater on their bond portfolios (some to catastrophic effect) .
duped 3y ago
The Fed literally killed multiple banks not six months ago.

olliej 3y ago

Isn't the goal of an SPAC to basically circumvent the IPO auditing and reporting rules to allow them to scam purchasers^w^w "streamline listing the stock"?

jonathankoren 3y ago
I always figured it was "We're old, and need money, but can't raise a round." If it was a viable business, just do an IPO.
paxys 3y ago
Yes. People will try and come up with long winded justifications for them but there's really nothing deeper going on. Failing companies want to dump shares on retail investors but don't want to go through IPO due diligence and reporting, hence SPACs.

NotYourLawyer 3y ago

People don’t like IPOs because the share price often pops immediately, and you feel like you’ve left money on the table. SPACs have 100% solved that problem.

gramie 3y ago

I'm sure that they made tidy profits for the executives involved, though.

eigenvalue 3y ago

This is one of those things that was just totally obvious to professional market participants while it was happening. I was working as an investment analyst at a huge ($10b+ AUM) hedge fund at the time and couldn’t believe the insanity and greed that was being displayed daily by SPAC sponsors and “investors”. Often the way this game worked was that if you were a large institutional investor who could be relied on to take a large allocation of the shares, you got special treatment and then could dump your shares on unsuspecting (and highly irrational) retail investors, at least while the insanity continued. It was fascinating to see how a bunch of professionals, who should have known better, each of whom were acting rationally (if not exactly ethically, although it was basically all totally legal), could nevertheless result in totally crazy malinvestment and capital destruction. Of course, it was all possible only because of uninformed retail holding the bag of worthless companies like Virgin Galactic, or real companies that were valued at silly levels because they were SPACs. It was amazing too just how many times the big SPAC sponsors (like Chamath, but also Alec Gores, Michael Klein, etc.) "went back to the well" to do the same thing again and again. The most egregious of all of these that I'm aware of is David Hamamoto, who did the SPAC deal for Lordstown Motors, which was basically an outright fraud (I shorted this one to the bottom in size at the time). Sadly, I doubt any of the people responsible for these huge losses by the public will ever be held accountable in any way, nor will the legions of professionals (lawyers, accountants, investment bankers, etc.) who enriched themselves while facilitating what they must have known were guaranteed duds for whomever would be left holding the bag (i.e., stupid retail investors losing their meager life savings.)

CraigRo 3y ago
I had trouble believing that these things were even legal given that we'd made the same mistakes during the 1920s. The very idea of 'let's form a company to get a bunch of money but we're not going to tell you what for' is entirely reminiscent of the south seas bubble language from the 1720s. I'm glad the SEC finally effectively killed these things.
- eigenvalue 3y ago
  Yes, just like the joint stock company that someone attempted to float during the time of the South Sea bubble that was described in the Madness of Crowds as being “For carrying-on an undertaking of great advantage but no-one to know what it is.” That always made me laugh. Crazy then and crazy now.

d136o 3y ago

The suckers aren’t just investors, but also employees who work at companies that hinted/promised liquidity via one of these transactions. I didn’t work at a company that failed to ipo via spac, but I almost did and although every technical interviewer felt earnest, something felt off about their lack of detail around business and the equity part of the comp. Too much of it felt like hot air and I went elsewhere. This was two years ago, and indeed some BS press release from a year ago says their “deal” fell apart. Seemingly reputable investors too, wtf. Keep your BS detectors on at all times.

geuis 3y ago

Yup. I generally enjoy some of the topics the guys on that podcast cover, but any time Chamath is on it's fairly cringey. I've seen enough scammy crap in my life, and unfortunately was part of briefly earlier in life, that when things like SPACs pop up the scams are fairly obvious. If anyone tries to sell you on something that doesn't make sense even after you spend some time researching it, it's probably in the scam bucket.