SPACS are just subprime startups
The 5X growth in SPAC issuance from 2019 to 2020 is not normal or safe.
In 1997, when I was 20, my Dad and I watched one of the first ever Subway Series games, in which our beloved New York Mets began a long tradition of getting defeated by the douchebag New York Yankees. Toward the end of the game, right after the Mets squandered their lead like the deadbeats they are, a commercial ran featuring a white, middle aged woman laughing in a field with her golden retriever. As the woman played with her dog a man’s voice said, “Ask your doctor if Lithium is right for you.” My Dad, who was already pissed off because the Mets suck, leapt off the sofa and screamed, “ARE YOU FUCKING KIDDING ME?!” He left and came back with more beer for us both.
The Mets’ Mike Piazza after getting knocked out by the Yankees’ Roger Clemens in the 1990s.
My Dad is a psychologist, and was shocked to see a drug like Lithium advertised like it’s Purina Dog Chow. Lithium is a high-power prescription drug for someone experiencing a psychotic episode or violent swings in their mood or energy levels. (The goddam Mets blowing a lead in the 9th inning is unfortunately incurable.) Someone who’s feeling a little down before their pure-bred Golden Retriever struts their stuff at the Westminster Dog Show would seriously hurt themselves if they took lithium.
In my subsequent career on Wall Street, I’ve seen a few reincarnations of ‘Lithium advertisements.’ Wall Street has a nasty track record of selling products that really should only be owned and prescribed by qualified professionals directly to the general public. These sales are kind of like cocaine: there’s a sudden surge of breathless, loud, enthusiasm followed by a nasty, dark down period. The dot-com bubble in which worthless startups IPOd so that VCs could foist their toxic holdings onto retail investors who didn’t look under the hood was one example. The subprime mortgage crisis in which predatory mortgages were sold to homeowners and then foisted onto investors as ‘low risk’ was another example.
And the current surge in SPACs is the most recent example
SPACs need to be identified for the ticking time bomb that they are. The bullshit justification for SPACs is that they enable normal Mom and Pop investors to invest in growth-stage startups that normally would only be accessible to professional, accredited investors. It also enables small, high-growth companies to raise capital from a broader market. When the SPAC bubble inevitably bursts and Congress holds hearings, SPAC lobbyists will argue that It’s an affront to American freedom and equity to only grant access to these investments to elitist billionaires like Peter Thiel. That argument will probably work - even though it’s populist bullshit.
The real reason SPACs exist is so that the Marc Andriessens and Peter Thiels of the world can offload shitty investments onto the general public before they implode. Normally, when an investment reaches a certain size and shows signs of trouble, the best option is to sell it to a private equity investor who can turn the company around, or admit defeat and wind the company down. With SPACs, investors have a third escape hatch: dumping those dogshit companies onto the general public. Your average CNBC viewer isn’t going to pour through the regulatory filings of a growth-equity stock looking for accounting disparities between the income statement and the balance sheet. They will, however, get jealous when their neighbor doubles their money overnight and buys a Tesla. Like cocaine, there will be a high before the darkness sets in. There will be enough high quality SPACs with enough high quality companies and enough irrational exuberance to keep this party going for a while before everyone is broke and divorced.
The other major underlying reason for SPACs’ popularity is low interest rates. Interest rates are currently near zero and when rates are this low, asset bubbles form. Companies that are not normally healthy enough to get a loan at a reasonable price suddenly have access to affordable credit. Investors are also able to take on low cost debt so they can buy more assets. The flaws that cheap credit conceal will inevitably start to show. Private equity and VCs know this. They know that now is a good time to exit high risk investments before they explode. SPACs are the perfect vessel for offloading these investments.
So the next time you’re encouraged to “ask your financial advisor if a SPAC is right for you” you should respectfully decline. When your neighbor buys a Porsche because they invested their 401k in a SPAC, be thankful for your trusty RAV 4. Because SPACs, like Lithium, are not for everyone.
What do you think? What overhyped trends do you think will deflate and pop?
