- To be sure, many of these deals will fail. SPACs are pulling venture capital forward, and venture capital is inherently speculative.
- And regulators should watch closely for conflicts of interest, including if SPAC sponsors are having pre-IPO conversations with potential targets (which is not allowed).
Reasons for (relative) calm: Unlike traditional venture capital or equities investing, though, SPACs have numerous guardrails.
- Some of them are structural. Redemption rights, IPO proceeds held in escrow via T-bills and the ability for unit-holders to rebuff a merger.
- There also is pricing pressure from the small number of institutional investors that have come to dominate the PIPE market. For example, it's not uncommon for a SPAC to win a bake-off by offering the highest price, only to renegotiate down after the letter of intent is signed. Not because the SPAC sponsor thinks it over-bid, but because the big PIPE players do.
- "Target companies hate when this happens, but they're in an exclusivity period once they've signed the LOI, so their only option is to negotiate or wait a while and start the whole thing over," a SPAC banker explains.
Normal market forces are also at work. For example, the SPAC buying Dyal Capital is now just trading at 4 cents above the offering price, reflecting concerns about if the deal can get done amidst the litigation. And, of course, there are short-sellers trumpeting their skepticism, like Muddy Waters yesterday unloading on SPAC'd XL Fleet.
The bottom line: It does feel like there's a SPAC bubble. But, as investing bubbles go, SPACs may be among the most benign.
