“The poem ‘Sinking like sediment through the day’ is the work of Philip Larkin and it offers a picture of disillusionment and a gathering sense of failure. Investors who have spent the past few months following the fad for SPACs in the USA may be sharing such feelings as share prices continue to slide – the Defiance Next Gen SPAC Derived ETF is now down by a third from its early-year peak and is even trading below its launch price from last autumn,” says AJ Bell Investment Director Russ Mould. “The fall from grace of the poster child for SPACs, Nikola, is even more stunning, as the electric vehicle start-up is down by nearly 90% from its high and is also trading below its acquisition price of a year ago.
“Such a rapid cycle of rise-and-fall offers further evidence, as if it were needed, of the value of Warren Buffett’s pithy observation that ‘speculation is at its most dangerous when it looks easiest.
“With 263 SPACs already floated this year and 308 more looking for a target, according to the website SPAC Insider, SPAC activity has soared to new highs.
Source: SPAC Insider
While some may strike gold and find a suitable purchase, many will find duds or at least overpay in the quest for a suitable business, given the sheer volume of activity and money looking for a home. The more capital that is thrown at something, the lower returns on capital are likely to be and SPACs are now proving a case in point.
Source: SPAC Insider
“This can be seen most clearly in the performance of the Defiance Next Gen SPAC Derived ETF, which trades under the ticker SPAK on the New York Stock Exchange.
“The instrument It is designed to track the performance of a basket of Special Purpose Acquisition Companies (SPACs) and then deliver that performance to its investors, minus its running costs and fees.
“Launched last September, the ETF has $60 million under management. Those assets are split 60-40 between companies that came to market via a SPAC and newly-listed SPACs which are yet to acquire. New companies are screened monthly and new SPACs quarterly.
“The ETF has lost all of the ground made in the wake of last autumn’s launch and the price has gone back where it started, to suggest that investor’s ardour for SPACs has waned as the number of suitors for their cash has continued to grow.
Source: Refinitiv data
“The number of holdings within the ETF has jumped from 137 to 211 in the past month but that does not appear to have helped performance. Leading positions include Draftkings, Pershing Square Tontine, Opendoor Technologies, Clarivate and Vertiv, as well as Open Lending and Virgin Galactic
“Granted, the diversified holdings list can help to protect investors from stock-specific risk and the danger that an individual SPAC goes wrong, if it picks a poor target or overpays for its prey.
“But the surge in SPAC issuance raises another danger, also once outlined by Mr Buffett, when he assessed a classic cycle for initial public offerings during a bull stock market:
‘First come the innovators, who see opportunities that others don’t. Then come the imitators who copy what the innovators have done. And then come the idiots, whose avarice undoes the very innovations they are trying to use to get rich.’”
