[HN Gopher] The SPAC Fad Is Ending in a Pile of Bankruptcies and...
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The SPAC Fad Is Ending in a Pile of Bankruptcies and Fire Sales
Author : fairytalemtg
Score : 71 points
Date : 2023-03-01 20:52 UTC (2 hours ago)
(HTM) web link (www.bloomberg.com)
(TXT) w3m dump (www.bloomberg.com)
| mikeodds wrote:
| Another worthwhile watch from the SPAC king Chamath
|
| https://twitter.com/silvermanjacob/status/159505980620064358...
|
| It seems insane to me these people dump on retail and their
| followers and continue to stand up in public.
| pavlov wrote:
| For these people it's always someone else's fault. Everything
| would have worked out if nefarious elites hadn't interfered, or
| if some of their followers hadn't been so weak-willed.
|
| But next time it's going to be perfect. The establishment will
| be foiled and everybody on our side will have diamond hands. So
| get in now, be early on the next wave, buy now before everyone
| else discovers this, etc. Rinse, repeat... SPACs, penny stocks,
| crypto, MLM pyramids, it's all the same story.
| GauntletWizard wrote:
| The really funny thing is, these guys hang out with and to a
| large extent are the nefarious elites. But that's sorta
| unsurprising; It's all based on capture and lock-in and bets
| on who will win the game of politics. Actual usefulness,
| financial solvency, and value-creation have limited effect
| here; Human decency is a direct liability.
| par wrote:
| Really unfortunate that a lot of crypto was just these rich
| dudes pumping and dumping, and all getting together to perform
| rug pulls on a bunch of 'retail investors'.
| trompetenaccoun wrote:
| It's like in any other space. The majority of participants have
| no idea what goes on and are played for suckers.
| lotsofpulp wrote:
| The public is free to invest in SP500. I assume people buying
| into SPACs were/are hoping that a greater fool comes along and
| they will not be left holding the bag.
| olliej wrote:
| I'd like to know what the failure rate for the regular IPO path
| is as well, and the article doesn't include that comparison.
|
| That said the failure reasons (cost of operations exceeding
| revenue, debt availability, excessively "optimistic" growth
| predictions, etc) are all things that do show up in the audits
| and financial documents go with an IPO, with the ability to file
| fraud claims on the company and execs if the financial documents
| and prospectus are false. The SPAC model removes the financial
| reporting requirements and seems to provide significant liability
| shields not present in the IPO path, so if nothing else it
| creates an incentive structure for actual fraud to use them.
| a4isms wrote:
| Not just a direct incentive for fraud, "speculative
| exaggeration," and "being economical with the truth," but an
| indirect one too. If you have a fairly reasonable business and
| want to go SPAC, you are competing for investor dollars with
| all the corrupt shills. You either stretch credulity yourself
| to raise money, or you won't raise funds.
|
| It's a market for lemons.
|
| https://en.wikipedia.org/wiki/The_Market_for_Lemons
| paganel wrote:
| > https://en.wikipedia.org/wiki/The_Market_for_Lemons
|
| Looking at the "Critical reception" section on that wiki
| page, meaning this part:
|
| > while the reviewers for Journal of Political Economy
| rejected it as incorrect, arguing that, if this paper were
| correct, then no goods could be traded.
|
| I can't see how that basic observation is not taken into
| account anymore. More exactly, 50 years from when that study
| was published we still have a well functioning used car
| market in pretty much the majority of the world countries,
| which would contradict the main point made by said study. Is
| there anything else that escapes me? Why did people in the
| economics profession fall for this study? Was it because of
| the maths?
| morelisp wrote:
| > Is there anything else that escapes me?
|
| "The market can stay irrational longer than you can put off
| buying a car."
| a4isms wrote:
| The paper speaks to markets where there is strong
| information asymmetry, not all markets, and it doesn't
| follow that no good can be traded, it simply says that in
| such a market, people will hold goods they feel have actual
| value and trade those that don't.
|
| Even in such a market for lemons, that doesn't mean no
| lemons will be traded, it means that buyers price
| everything like a lemon, and we still have a functioning
| market.
|
| I don't know about the whole world, but up here in Canada
| the used car market is exactly like this. Nobody trusts
| that guy with a small lot who operates out of a portable,
| so they won't pay good money for anything he sells. So he
| has no incentive to sell good cars.
|
| I bought a used car... From a dealer, and I have a factory
| warranty on it. That's a market where there is less
| information asymmetry: I know the dealer was required to
| bring the car up to a certain level of service for it to
| qualify for the factory warranty, and I know that if it
| breaks down, I can get it serviced.
|
| Cars that don't meet this standard are sold by dealers too,
| but you can't get a factory warranty, and they are priced
| accordingly. They might be good, but if a car meets the
| standard for a factory warranty, what dealer would offer it
| without that warranty, just to deal with customers who are
| skeptical of its reliability?
|
| A market for lemons is still a market, and it finds an
| equilibrium where the lemon-ness gets priced into
| transactions. People certainly can and do trade lemons.
| paganel wrote:
| > A market for lemons is still a market, and it finds an
| equilibrium where the lemon-ness gets priced into
| transactions.
|
| Yes, I agree, and I think that's related to the
| accusation of "triviality" made by some of the reviewers.
| If the "lemon-ness" is already priced in, then where's
| the thing that would make this theory special?
|
| > I don't know about the whole world, but up here in
| Canada
|
| I'm from Eastern Europe where the second-hard market is
| relatively more important compared to Western countries
| for objective reasons, but as far as I can tell there are
| lots of people purchasing SH cars in North America from
| the likes of Craigslist and FB Market (more recently)
| without any mention of warranties and the like. Those
| markets are highly functional.
| inamberclad wrote:
| Wouldn't an investor want a company to be undervalued at IPO?
| Buy in early and low, and wait for the market to realize the
| true value.
| a4isms wrote:
| I was speaking to the pressure on businesses to inflate
| their promises, which drives real businesses out of the
| market, leaving only unicorn dreams and pixie dust
| prospectuses.
|
| If you are raising funds, you are telling investors you
| have value, and that the IPO price is early and low. But if
| it's a market for investments, then everybody else with a
| SPAC is saying the same thing, and if they're selling pixie
| dust and unicorn dreams, they are promising even greater
| returns than you are if you're trying to run a "real
| business."
|
| You either get in on the reality distortion field, or get
| washed out.
| JumpCrisscross wrote:
| > _seems to provide significant liability shields not present
| in the IPO_
|
| Less liability shield than a lack of information for which to
| be liable. If I have a magic-bean startup and am asked if it
| cures cancer, an IPO forces me to say yes or no. A SPAC lets me
| shrug and wink and launch into a speech on why cancer is bad.
| fairity wrote:
| For those curious in learning more about how SPAC's work and the
| associated costs & returns for various stakeholders, I found this
| paper to be pretty comprehensive:
| https://site.warrington.ufl.edu/ritter/files/SPACs.pdf
| pbreit wrote:
| Was there anything inherently bad about the SPAC approach or did
| it mostly just attract lousy users?
| VLM wrote:
| It was an initially very profitable but thin market, so returns
| went hard negative very fast once the market was cleared.
|
| So the usual behavior, the first entrants make a ton of money,
| then the rest of wall street piles in behind them, although the
| market of "good deals" emptied out really quickly so returns
| rapidly went from very positive to very negative.
|
| Its literally an inflation situation although instead of too
| much consumer money chasing too few consumer goods, its too
| much capital chasing too few good deals.
| mikestew wrote:
| I think it better to ask, "what is the value-add of a SPAC over
| traditional IPO?" Because there's an existing channel to take a
| company public, why all this hinky backdoor runaround? To
| summarize what sibling comments illustrate, lots of bars get
| lowered (due diligence, et. al.) for a SPAC.
|
| As an individual investor, ask yourself, "why would such a
| solid company need lower barriers to going public?" And after
| you answer that question for yourself, you stay the hell away
| from such things. Because those things are not meant to enrich
| _you_.
| paulgb wrote:
| A combination of lower due diligence requirements and high
| (effective) fees meant that companies that _could_ go a more
| traditional IPO path usually preferred that path. The leftovers
| were mostly the duds.
|
| It was kind of a market for lemons:
| https://en.wikipedia.org/wiki/The_Market_for_Lemons
| joncp wrote:
| https://archive.is/ZfZkN
| noizejoy wrote:
| It may not be entirely coincidental that a lot of financial
| carnage is happening just after the large scale printing of money
| (quantitative easing) stopped, interest rates started rising and
| borrowing money became no longer almost free (for the wealthy).
|
| Arguably numerous "new" financial constructs only worked with
| free money. Meme stocks, crypto, SPACs and very large VC funding
| may have needed all that free money to "work"?
|
| So maybe we're just returning to more traditional financial
| investment patterns?
|
| Some or all of those financial constructs probably still have
| their place on a much reduced scale in more specific contexts.
| But it's no longer guaranteed free money.
|
| I'm assuming that there are quite a few PhDs and other books in
| the works that will analyze those connections/dependencies in
| considerable detail.
| airstrike wrote:
| To add to that list of factors: it's also the end of the
| decades-long ride in Technology stocks which drove a lot of
| FOMO sentiment that made that money so easily available...
| nobody wanted to miss out on the next Facebook, the next Uber,
| the next Airbnb, the next Theranos--wait
|
| The quality of the assets for these moonshot unicorns declined
| over time (IMHO partially because they were increasingly moving
| away from pure-bits to bits-and-atoms, making business cases
| much harder to execute and expensive to fund) and then the
| macro backdrop soured and here we are
|
| Bonus: here's what StableDiffusion drew for "A dream of
| moonshot unicorns, 4k trending artstation" because why not...
| https://i.stack.imgur.com/sFxIw.png
| ChrisMarshallNY wrote:
| I'm looking forward to companies that actually have viable
| product ideas.
|
| When money is tight, you are less likely to throw it at an AI-
| powered cheese-straightener, just because the founder did a
| great TEDx talk.
| civilized wrote:
| Meme stocks are the weirdest part of it for me. GameStop is
| still priced several times the pre-meme value.
| TinyRick wrote:
| The company is also in a much better financial position than
| it was pre-meme. They took advantage of their insanely valued
| share price in mid-2021 and performed an at-the-market equity
| offering which allowed them to pay off loans and improve
| their balance sheet significantly.
| filoleg wrote:
| > GameStop is still priced several times the pre-meme value.
|
| As long as it keeps going on its current trajectory, it won't
| stay above the pre-meme value for much longer.
| afandian wrote:
| https://en.wikipedia.org/wiki/Special-purpose_acquisition_co...
| aruanavekar wrote:
| 2021 counts were huge, but low on value
| https://www.spacinsider.com/data/stats
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