SPAC Rout removes $ 75 billion in home value

A group of 137 SPACs that closed mergers in mid-February have lost 25% of their combined value. At one point, last month, the withdrawal exceeded $ 100 billion. The analysis does not include companies that had not closed mergers in mid-February or those that are no longer listed.

In the same period, a publicly traded fund that tracks companies that recently went public through initial public offerings fell by 12%. The Dow Jones Industrial Average gained 13%.

SPAC declines are concentrated in companies related to green energy and sustainability, although the damage is widespread. Approximately 75% of SPACs that have announced offers but have not completed them are listed below their sale price. Earlier this year, when the sector was perhaps the hottest financial area, SPACs almost always increased after announcing agreements. Now, it is common for SPACs, like the one that said in June to take public the electric taxi company flying Vertical Aerospace Group Ltd., to reveal mergers and see their shares fall.

The withdrawal hits funds managed by companies like BlackRock Inc.

BLK 0.91%

and Fidelity Investments Inc., as well as many hedge funds, pension managers and other investors who rushed to put money into SPAC during the boom that began late last year. Many of these funds were soon enough to invest at low prices, which means they continue to earn substantially. In fact, the value of the sector remains around $ 250 billion, compared to approximately $ 100 billion the previous year, reflecting stock price increases and new entrants.

Still, the shocking returns earlier this year have boomeranged in many late arrivals, highlighting the ever-present risks of concentrating on the safest. Some investors have seen paper fortunes dwindle in recent months.

“I don’t tell my wife many of the red days,” said Alex Vogt, a 30-year-old medical assistant in Grand Rapids, Michigan, who has most of his portfolio tied to electric vehicle companies that merged with SPAC with Lucid Group Inc.

LCID 4.47%

and ChargePoint Holdings Inc.

CHPT 9.42%

The operator of a Twitter account called “EV SPAC” also trades with Tesla Inc.

TSLA 0.30%

and film operator AMC Entertainment Holdings Inc.,

one of the favorites for investors this year.

Mr. Vogt’s portfolio topped $ 1 million earlier this year. It fell to around $ 600,000 in August, although it is still much higher than it was a year ago.

A SPAC is a shell company that collects money and is listed on the stock exchange with the sole intention of merging with a private company and making it public. The combination with a SPAC has become a popular alternative to a traditional initial public offering, because it is often faster and allows the listed company to make business projections, which are not allowed on a traditional IPO.

SPAC offers that value interesting companies such as Lucid and personal finance application operator SoFi Technologies Inc.

with a record of about $ 525 billion this year, according to Dealogic data.

Some investors call the summer 2021 investment an inevitable return to land. Many companies merging with SPAC have little revenue, however, have valuations of billions of dollars or more.

“The air has come out of the bubble,” said Roy Behren, managing member of Westchester Capital Management and SPAC investor. “This is the cost of speculating on companies that have a potentially bright but uncertain future.”

The reversal also shows the risks of trading options — which allow the holder to buy or sell an asset at a certain price in the future — and other complex securities. Many investors in SPAC, such as Mr. Vogt, are securities issued by SPAC that confer the right to purchase shares on the established terms. Like options, they tend to move more than the underlying stocks.

High-profile instances of electric vehicle companies misleading investors into SPAC deals and the poor financial results of many companies have cooled the creation of new blank check companies and led to stock price falls. Regulators have helped ease sentiment by increasing their control of the sector in recent months.

Stock price declines can create a negative feedback loop for SPACs, because investors have the right to withdraw money from blank check companies before mergers pass. They are much more likely to do so when SPACs are quoted below their selling price, which many currently are. More than 95% of blank check companies have not yet announced offers that are listed below this level.

Withdrawals from large investors can cause the company to trade on the stock market with much less cash, making it difficult to achieve its business goals and can fuel a deeper fall in stocks.

Several companies, such as the home insurance technology company Hippo Holdings Inc.,

hypo- -17.57%

they have lost 80% or more of their SPAC funds in recent weeks. Hippo shares, which were made public in a roughly $ 5 billion deal, with a SPAC backed by LinkedIn co-founder Reid Hoffman and Mark Pincus, who founded mobile gaming firm Zynga, have fallen around of 60% in the last six months.

Some buyers say they knew there would be highs and lows.

“I knew I was looking for high volatility when I got into this,” said Keith Williams-Parker, 38, a Virginia professor who has the majority of his portfolio of about $ 85,000 in companies that merged with SPAC. It peaked north of $ 100,000 earlier this year.

Williams-Parker said she is trying to emulate star technology fund manager Cathie Wood at leading companies such as SoFi and energy storage company Stem Inc. which have growth potential.

“I’m still swinging through the fences,” he said.

—Kenny Jiménez contributed to this article.

Write to Amrith Ramkumar at [email protected]