I have been writing about firms or sectors of the economy that are now in the midst of restructuring because the economy has changed, more specifically, the monetary policy of the Federal Reserve has changed.
This new area was one of the hottest in the financial markets over the past two years or so, but, now the overextension is coming back to generate losses or substantial possibilities for loss.
The current area under review is the space associated with the Special Purpose Acquisition Funds of SPACs.
Amirth Ramkumar writes in the Wall Street Journal,
“An investor stampede out of risky trades is squeezing SPACs that are running out of time to find companies to take public, potentially leaving their architects without deals and saddled with sizeable losses.”
Note that the quotations in this post are all from Mr. Ramkumar’s article in the Wall Street Journal.
Once upon a time, the financial markets were rocked with an excessive amount of money.
Thank you Federal Reserve System.
Investors could not find enough outlets to put all the funds that were available to them.
As a result, they searched and they searched and they searched.
And, they found outlets.
Initially, they seemed to have hit a “grand slam” with their efforts as asset prices rose and rose and rose.
New things came along… like cryptocurrencies.
Cryptocurrencies, like Bitcoin, were sold off at relatively modest prices.
But, then as the Fed pumped up more and more money into the financial markets over the past year, the price of these assets, like the price of Bitcoin, took off.
At its peak in early November 2021, the price of one Bitcoin was in excess of $67,000.
But, the rumor was getting around that the Federal Reserve was going to tighten up its monetary strings and raise its policy rate of interest. And, this fact was pretty well established by the first of the year.
By the end of January 2022, the price had fallen as low as $35,000.
On Wednesday, May 18, the price dropped below $28,000 for a while.
“Firms that have gone public through mergers with special purpose acquisition companies have tumbled lately alongside the technology sector and cryptocurrencies.”
These SPACs, or, blank check companies, are shell companies that raise money from outside investors and trade on a stock exchange with the sole intent of merging with a private company to take it public.
The timing of the deal must be within two years. The founders must return the money to investors and forfeit the money its creators used to create the company, sometimes $5 to $10 million.
Movie stars, sports stars, and music stars served as the drawing point for many of the companies in order to help raise money.
After a booming start, the SPACs have not all done that well.
An exchange-traded fund tracking companies that merged with SPACs is down about 30 percent for the year.
“Even shares of companies taken public by some of the most popular SPAC creators have tumbled.”
More startling still is that there are roughly 280 SPAC funds that have raised money in the early years of the frenzy last spring, 2021, and face deadlines in the first quarter of 20232.
It is estimated that a large portion of these deals will fail.
Furthermore, the window is closing on many of these deals because “it often takes months to find a deal….”
And, given the market conditions in the stock market, many firms that might have been candidates for these blank check companies, have pulled out of the market, leaving the SPAC, holding the bag…so to speak.
“It’s a ticking time bomb,” according to Matt Simpson, managing partner at Wealthspring Capital and a SPAC investor.
Analysts are now expecting that the creators of these SPACs and other insiders may lose as much as $1.0 billion or more that has already been spent.
Furthermore, some 90 percent of the companies that completed SPAC mergers during the boom that started in 2020 now trade below the SPAC’s initial listing price.
John Chachas, co-managing principal at Methuselah Advisors, a boutique investment bank, states,
“It’s an extraordinary amount of money that will be truly lost.”
Patrick Galley, a SPAC investor, and chief executive of RiverNorth Capital Management, adds,
“There are definitely a lot of people that just jumped on the bandwagon.”
And, now we wait.
Historically, this is not an unusual setting.
The economy seems to be in trouble.
The central bank injects lots and lots of money into the banks and the financial system.
Investors don’t know exactly what to do with all the money that is available to them.
Investors search around and find possible deals here and there and they reuse ideas that have been used in the past but have fallen dormant.
And, they invest and invest in these opportunities.
Initially, things start out well.
The money flowing into these opportunities grows and expands.
Everyone is happy, including the monetary authorities, because they have prevented a banking collapse or whatever when this central bank flooding of the banking system began.
Then, the central bank has to tighten up again. Too much money chasing too few goods, all coming from the period of monetary ease that prevented the economic collapse.
And, now the flooding of money comes home in losses and defaults.
More and more it looks as if we are moving into such territory.