The Spac boom will hand investors “a pretty expensive lesson” as the race to go public via blank-cheque vehicles creates “castles in the sky”, a leading short seller has warned.
Jim Chanos, who remains best-known for predicting the collapse of energy group Enron, accused some who have taken companies public via a Spac of “playing fast and loose with their projections” in an effort to entice retail investors.
Kynikos Associates, the hedge fund founded by the 63-year-old, is betting against a number of Spac companies that are “very bad businesses” and whose valuations “have gotten silly”, Chanos said. He declined to name them.
The criticism comes as scandals at several high-profile Spac companies begin to damp the euphoria generated by a boom that started last year and gathered momentum early this year.
US electric truckmaker Lordstown Motors this month warned its business might run out of money despite previously declaring that it had enough cash to build its flagship vehicle. Rival Nikola, which went public in June 2020, has also drawn scrutiny for several of the claims it has made over its technology.
“You’re seeing all kinds of situations now that probably wouldn’t pass muster in the IPO process that are coming public via the Spac machinery,” said Chanos.
“As the boom has gone on, we suspect that more and more companies are playing . . . fast and loose with their projections in order to entice investors to commit capital.”
Spacs, or special purpose acquisition vehicles, raise money from investors through a listing on the promise of merging with a real business. Over the past 18 months, blue-chip mutual funds, private equity firms and retail investors have ploughed money into them.
They have raised $100bn globally from 370 listings this year, according to data provider Refinitiv, and there more than 400 Spacs now hunting for companies to buy.
Companies going public via a Spac instead of a traditional IPO have greater licence to make bold sales forecasts — something that has already drawn the attention of the Securities and Exchange Commission.
Chanos said that the regulator should intervene because “that’s [the projections] where investors get stars in their eyes and are prone to losing a lot of money.”
The bonanza has thrown up several prolific sponsors, the name given to Spac founders, including former Facebook executive Chamath Palihapitiya, ex-Citigroup dealmaker Michael Klein and Cantor Fitzgerald chief executive Howard Lutnick.
Chanos cautioned against the danger of investors being beguiled by reputations, while also warning against “smart guy syndrome” or the “celebrity patina” where high-profile names are brought in to endorse a deal.
Sports betting company DraftKings, for example, added celebrities to its board, including basketball legend Michael Jordan and supermodel Gisele Bündchen.
“You have to be very, very careful when you follow people into things,” said Chanos.
However, the veteran short seller, who has run New York-based Kynikos for more than three decades, is not entirely hostile to the Spac market. Kynikos has taken long positions in blank-cheque vehicles that are trading below the $10 that they list at before going on to buy a company.
The Spac boom has emerged alongside a stunning rebound in US stocks over the past year. The benchmark S&P 500 is up 95 per cent from its low reached in March 2020, when the onset of the pandemic hammered markets.
It has proved a testing backdrop for short sellers. Although Kynikos made almost $100m betting against German payments group Wirecard, its assets have fallen below $1bn after peaking at around $7bn following the financial crisis.
There are bubbles beyond Spacs, Chanos said, pointing to the example of Torchlight Energy, a US company that began life offering fitness classes based around pole dancing but has since turned into a shale producer. It is raising money after its shares soared more than tenfold this year.
“Life is rough on the short side,” said Chanos. “If I was a stripper pole company, but announced a merger, I think I could raise a lot more money than the short sellers are right now.”