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Three alleged SPAC scams underline the risks of booming asset class

  • More funding has been raised by SPACs this year than IPOs, but the asset class is now under strain

  • The SPAC Index is down 23% since its February peak

  • Three recent scandals in SPACs highlight the pitfalls, including one in EM Asia

Three alleged SPAC scams underline the risks of booming asset class
Nirgunan Tiruchelvam
Nirgunan Tiruchelvam

Head of Consumers Equity Research

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Tellimer Research
25 April 2021
Published byTellimer Research

The SPAC boom has been relentless this year. Over US$100bn has been raised in SPAC IPOs in 2021 compared to US$83bn raised in 2020. Over 300 new SPACs have IPOed in total. At this rate, the number of SPACs issued in 2021 will dwarf the record 2020 figure by a factor of 4.

Value of SPAC IPOs (US$ bn)

Since Bloomberg started tracking the asset class in August 2020, the SPAC Index has outperformed the S&P 500 and MSCI EM indices by c18% and 21%, respectively.

Relative Performance

But three 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

SPACs have unique risks

These three warnings demonstrate the unique risks of SPACs:

  • There is a heavy reliance on the reputation of the sponsor. The difficulties in all three cases above relate to the sponsor's agenda. Investors need to assess sponsor risk judiciously.

  • There is significant potential for fraud. SPAC deals cannot be married deals. In other words, the target of a SPAC acquisition cannot be connected parties. 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.

  • 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. There is a risk of very little action once the SPAC listing is completed.

If anything, these risks are magnified in SPACs focused on emerging markets.