SPAC surge turns to slump as scrutiny increases

  • As SPACs have come under greater scrutiny, unique risks are now coming to light
  • Alleged SPAC scams underline these risks
  • The market has begun to punish the space due to corporate governance issues
SPAC surge turns to slump as scrutiny increases

Warren Buffett has described the SPAC boom as 'a killer' with too much money chasing too few companies, and his partner Charlie Munger suggested many SPAC deals went ahead because the adviser gets a fee rather than due to the benefits of the underlying businesses. Though SPACs have raised money at a frenetic pace in 2021, the market seems to be tiring of this type of investment vehicle.

Value of SPAC IPOs (US$ bn)

The SPAC Index has outperformed the S&P500 Index and MSCI EM Index by 17% and 21% since August 2020 when Bloomberg began tracking the space. But it has fallen 22% from its peak in February.

Relative Performance

More than 40% of the SPACs issued in 2021 are trading below US$10.

Proportion of SPACs issued in 2021

SPACs have unique risks

The market may be getting cold feet due to the unique risks of the asset class. These include the following factors.

  • There is a heavy reliance on the reputation of the sponsor. Investors need to assess sponsor risk judiciously.

  • There is a high potential for fraud. SPAC deals cannot be married deals, meaning that the target of a SPAC acquisition cannot be a connected party. However, there are allegations that some of the SPACs have breached this principle. According to Phase 2 Partners, Tritteras has been involved in a married deal (more details below).

  • With more than US$100bn raised by SPACs this year, there is a high probability that much of the funding will be uninvested for an extended period. Therefore, there is a risk of very little action once the SPAC listing is completed.

These risks are heightened in SPACs that focus on emerging markets.

Alleged SPAC scams underline the risks of the asset class

  1. XL Fleet Corp is a company that transforms existing commercial vehicles like small trucks into EVs. It offers Electric Solutions for vans, pickups, and buses in the US. It plans to expand to emerging markets. It listed through a SPAC late last year.

    Muddy Waters, a short seller, has questioned XL Fleet's technology. It has also stated that XL Fleet has exaggerated its sales pipeline. It says this has been done by XL Fleet to rationalise its revenue forecasts.

  2. QuantumScape, a battery startup that has listed through a SPAC deal, was the target of a short-selling report last week. Scorpion Capital, the short seller, has accused and questioned the credibility of QuantumScape's technology. Scorpion Capital calls it a "pump and dump SPAC scam by silicon valley celebrities." QuantumScape has fallen 15% since the accusation.

  3. Triterras, a commodity trader that uses blockchain, was the first Singaporean company to be bought by a SPAC. It was bought by Netfin in June 2020, long before the Grab deal. The deal was valued at US$939m, including US$269m of new financing.

    Triterras has a trading platform that runs on the Ethereum blockchain called Kratos. The Kratos platform was touted as a transparent alternative to the traditional forms of trade finance. It would help avoid fiascos like the Greensill-Gupta Group scam. While the Gupta Group had allegedly pledged its inventory to multiple financiers, blockchain would – in theory – provide independent verification of inventory, and thereby prevent multiple pledges of the same cargo.

    However, Triterras has been accused of the same impropriety that its platform sought to eliminate. On 15 January, Phase 2 Partners, a short seller, alleged that 75% of transactions conducted on its platforms were related party transactions.

    According to the short-seller, Tritteras has been exaggerating its revenue by relying on Rhodium, a commodity trader that is connected to Tritteras' controlling shareholder. Rhodium has massive liabilities that are a cause for concern for investors. A class-action lawsuit filed by Bernstein Liebhard has accused Triterras of suppressing its dependence on Rhodium.

    YTD performance

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This report is independent investment research as contemplated by COBS 12.2 of the FCA Handbook and is a research recommendation under COBS 12.4 of the FCA Handbook. Where it is not technically a res...

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