Ray Dalio, co-chief investment officer and co-chairman of hedge fund Bridgewater Associates, in his latest blog post identifies about 5% of the top 1,000 companies in the US are in a bubble, according to his analysis and classification. This works out at about 3% of the S&P 500 index and these relative handful of companies have seen stellar share price increases of about 350% on average over the past year or so (chart below from Dalio).
Naturally, this sort of bifurcated market attracts investors to find the next big thing and speed is of the essence. This creates the demand for faster flotations, particularly if they can include egregious remuneration for insiders bringing these deals to market – otherwise known as special purpose acquisition companies (Spacs).
Matt Taibbi and Eric Salzman in their podcast adds Spacs to their Financial Devil’s Dictionary.
As they note: “America still leads the world in one thing: inflating speculative bubbles using gibberish finance acronyms. Meet the latest ‘Get-Super-Rich-Quick’ scheme, the Special Purpose Acquisition Company.
The temptation to leap on these Spacs is certainly high. As the Economist in its latest issue notes: “Last year in America, underpricing led to $30bn of unrealised gains for newly public companies (and their employees). With Spacs and direct listings, another route to going public, there is no pressure for a price to pop.”
In its earlier article, the Economist quoted academics Michael Klausner and Emily Ruan of Stanford University and Michael Ohlrogge of New York University who looked at blank-cheque firms that made acquisitions between January 2019 and June 2020. They found that while companies that went public through the Spac route fell in value by an average of 3% after three months, 12% after six months and by a third after 12 months, about half the sample were “high-quality” – defined as those run by former Fortune 500 bosses or set up by large private-equity firms – and these performed much better.
Whether quality will remain high is unclear. As Taibbi and Salzman said: “In 2021 already, 160 Spacs have raised over $50bn, nearly matching last year’s record of $83.4bn.”
Given Spacs tend to raise more cash once they find an acquisition target (about five times that in the initially listed pot, the Economist reckons) this could bring $600bn of deals in the next one to two years, which is about double the entire global VC market based on Pitchbook’s data for 2020 deal values.
A bit more speed and a chance to replace venture capital or private equity in some businesses makes it a development that could outlast these bubble conditions. If not, it will return to the dusty archives storing investment trusts, payment-in-kind notes, collateralised debt obligations used in prior bubble eras to soak up excess liquidity and irrational exuberance.
