Shares of tech firms and special-purpose acquisition companies rose on Tuesday, recovering after a series of weeks of falls that dropped some popular SPACs by 20% or more in a month.
The Nasdaq Composite rose 3.7% for its biggest advance since November, reducing a recent slide that just a day earlier dragged it more than 10% below the high it reached in February. Shares of the electric vehicle company Tesla Inc.
recovered 20%, adding more than $ 100 billion to the company’s market value, or about twice the value of Ford Motor Co.
Some popular companies that have made public their merger in recent years with the so-called SPAC, including the online real estate firm Opendoor Technologies Inc.,
space tourism company Virgin Galactic Holdings Inc.
and the electric vehicle company Lordstown Motors Corp.
—Added 6% or more on Tuesday. All of these continue to fall by at least 30% in the last month.
Tuesday’s changes highlighted the dynamics of competition unfolding in financial markets as the economy recovers from shutdowns designed to stop the spread of coronavirus. Investors sold for weeks SPAC and popular Internet companies, becoming stocks of banks and energy producers who believed they would do better as the economy recovered and public bond yields increased.
Also called blank check companies, SPACs are shell companies that are listed on a stock exchange for the sole purpose of acquiring a private company to make it public. The private company, often a startup, gets SPAC’s place in the stock market. Merging with a SPAC has become a popular way for companies to go public because the process entails weaker regulatory requirements and results in large returns for Wall Street and Silicon Valley investors.
Investors have invested money in SPAC at a record rate this year (about five are created daily and have raised nearly $ 75 billion, according to Dealogic), a sign of exuberance because traders often bet on SPAC executives to make an attractive deal. Although SPACs and other hot investments rebounded on Tuesday, recent changes have generated many investors preparing for an increase in turnover in the coming days.
“It’s going to be more violent,” Evan Ratner, SPAC’s portfolio manager at Easterly Alternatives, said. Unless government bond yields record a sustained fall, “volatility has come to stay,” he added.
With the yield on the US Treasury benchmark at 10 years, on Monday stood at 1.6%, compared to 1% at the end of January, some analysts question the SPAC and other popular investments. Treasury yields, which rise as bond prices fall, fell on Tuesday, at least temporarily, easing concerns about a rapid rise in economic activity that is forcing the Federal Reserve to raise interest rates faster. currently planned.
Private companies are flooding special-purpose acquisition companies, or SPACs, to avoid the traditional IPO process and get a public listing. WSJ explains why some critics say investing in these so-called blank check companies is not worth it. Illustration: Zoë Soriano / WSJ
Rising bond yields hurt SPACs and other technology stocks because they offer investors a more attractive alternative to speculative betting. SPACs have no business until they acquire a startup to make it public, so the exaggerated profits of blank check companies surprised many analysts because the money was poured into space even when it meant buy at prices higher than the amount of cash the SPAC had to make a deal.
Market volatility also wrapped up SPACs that have yet to reveal which companies make them public. Even with Tuesday’s rise, Pershing Square Tontine Holdings, the billionaire hedge fund William Ackman Ltd.
PSTH 1.99%
has fallen 11% in the last month, sliding alongside other popular SPACs, such as share capital Hedosophia Holdings Corp., venture capitalist Chamath Palihapitiya. VI IPOF 4.56%
and GS Acquisition Holdings Corp. II.
GSAH 0.55%
Recent twists and turns mark what some analysts call an inevitable return to earth. With the creators of SPAC crying out to raise more money and capitalize on the excitement, some investors see the changes as a necessary check of reality after a period of over-optimism.
“You see people rushing to do it while the window is still open,” said Roy Behren, managing member of Westchester Capital Management and SPAC investor. And among investors, “everyone wants to own the next DKK DraftKings 2.81%
or Virgin Galactic, ”he said, referring to two of the most popular companies that went public by combining with blank check companies.
Tuesday’s moves showed how many on Wall Street have linked SPACs to technology stocks and cryptocurrencies, meaning companies with blank checks are prone to huge-sized moves when investors following trends buy or sell all of them. these assets together.
The variations mean the huge paper gains made by active SPAC creators like Mr. Palihapitiya and former Citigroup Inc. deal maker Michael Klein have shrunk and some investors who have stacked at SPAC at high prices have been beaten. Investors betting on declining stocks linked to the sector are encouraging change.
But turbulence also opens up even more opportunities for investors looking for bargains. With SPACs underway to soon eclipse last year’s record total of more than $ 80 billion raised, individual traders have new chances to enter soon with blank verification companies at prices that are normally only available for the big institutions.
And some SPACs have even fallen below the levels that correspond to the amount of cash they have on hand. Because investors can withdraw this cash before entering a SPAC deal, buying at a lower or lower price can produce risk-free returns.
With about 400 SPACs on the market looking for companies to make public, volatility is likely to just begin.
“It’s still an extremely interesting space,” Behren said.
Write to Amrith Ramkumar at [email protected]
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