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SPAC sponsors who ‘stacked’ during the boom could face a $4 billion tab

(Bloomberg) – Blank check sponsors who jumped on the bandwagon to cash in on the SPAC boom could find themselves with a bill of around $4 billion as they close up shop and return money to investors . This is on top of the estimated $352 million they have already lost this year.

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The SPAC craze was a gold mine for sponsors like “SPAC King” Chamath Palihapitiya and Howard Lutnick. They were ahead of the game and took advantage of a bull market that buoyed the industry with investors willing to pay hefty premiums for heaps of cash. Now that the bubble has burst, sponsors who “hoarded in during the 2021 boom” could lose billions, according to University of Florida finance professor Jay Ritter.

Sponsors could lose an average of about $8 million in capital at risk — mostly fees for underwriters and the like — with each liquidation, Ritter says. With 646 active SPACs seeking targets or pushing to complete them, and an average of about eight deals completed per month this year, he expects more than 80% of SPACs will have to close.

This would result in losses of approximately $4.1 billion for failed businesses. But that number could be closer to $5 billion given that newer SPACs have essentially paid additional investors to participate in the initial public offering, Ritter said.

“A lot of these pretty sophisticated finance professionals were a little guilty of chasing past performance,” Ritter said by phone. “Six months from now it might be interesting for a sponsor to go public with a SPAC, but I’ve been scratching my head for 18 months in the rush to spend $8 million to get into an incredibly competitive market.”

So far this year, 44 SPACs have closed and returned the billions they raised to investors, compared to just one over the same period in 2021. Dozens more are scrambling to close shop before the end of the year.

Alec Gores, one of the most respected sponsors, said Thursday that three of his SPACs, which raised a total of $1.3 billion last year, want to close soon. While the company is “committed to the SPAC product for the long term,” it acknowledged that “the current SPAC market reset is necessary in light of the activity of the past two years,” Gores said in a statement.

Issues for SPACs include a closed window for traditional IPOs and a struggling economy, as well as pressure from U.S. regulators. Before the boom days brought more than 800 new SPACs over a two-year period, the market had presented a niche opportunity for companies that wanted to go public without some of the caveats of an IPO.

That was turned upside down when retail traders stuck at home have plenty of cash and Wall Street pros looking to make a quick profit factored in.

The bubble burst

“It’s bubble business,” says Enrique Abeyta, of sponsors’ impending billions in losses. Abeyta follows SPACs as editor of Empire Financial Research. “The vast majority of these SPACs won’t do anything,” he said.

The fallout from failed efforts has hit experienced teams, those with little or no SPAC experience, and the countless companies that have tied their hopes to celebrities and athletes. Palihapitiya and Bill Foley recently waived two SPACs. Financier Patrick Orlando calls for the conclusion of the agreement between Digital World Acquisition Corp. and Donald Trump’s media enterprise to avoid a third failure.

Certainly, many sponsors in the beginning made considerable profits from their ventures. For the 284 SPACs that entered into deals or closed from 2015 to September 2021, sponsors had an average net gain of at least $46 million, according to an article by Ritter and Minmo Gahng and Donghang Zhang. This means that their total profits over this period were around $13 billion.

“Much like real estate investors in 2001-2008,” those who came in early did “very well on average,” while the group that was late to the party lost money, Ritter says.

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