Investor Appetite for SPACs Appears to Cool Off

The SPAC mania of 2020 is still running hot, but investors might not be as excited as they once were to make big bets on the trend. 

According to financial analytics platform Dealogic, SPACs have already broken last year’s record by raising a whopping $90 billion in just the last three months. 

Roughly five new SPACs are being created daily, and everyone from celebrities to Silicon Valley tech titans to veteran Wall Street investors have jumped on the bandwagon. The trend has touched most sectors in the market, including entertainment and media

As noted, there are a slew of familiar Hollywood names in on the hype.  

Former MGM CEO Harry Sloan and partner Jeff Sagansky recently formed their seventh and largest SPAC, called Soaring Eagle Acquisition Corp. The SPAC’s IPO raised a cool $1.75 billion, far more than other offerings in the space.  

Sloan and Sagansky quickly became SPAC veterans, and their previous ventures have been successful. Flying Eagle Acquisition went public in March 2020 and recently closed a deal to acquire gaming platform Skillz. After going public in May 2019, Diamond Eagle Acquisition merged with DraftKings in April 2020. 

Meanwhile, former Disney exec Kevin Mayer is working with former colleague and ex-Disney CFO Tom Staggs on a second SPAC acquisition. Their first SPAC successfully merged with digital fitness company Beachbody. 

But not all SPACs are successful. It’s not always easy finding a suitable merger candidate, and even if a merger is completed, it’s not always a match made in heaven. It’s important to note there’s a two-year deadline for SPACs to find a company to merge with, or they risk having to return money to their investors. 

Despite the gamble, some media companies are looking to consolidate resources and merge, with further hopes of expansion through acquisitions.

Earlier in March, it was reported that Buzzfeed was exploring the possibility of going public through a merger with a SPAC called 890 Fifth Avenue. And most recently, there have been talks of a merger between sports media outlet the Athletic and digital news site Axios. The plan reportedly includes the possibility of going public through a SPAC.

However, investors’ appetites for SPACs seem to be cooling off. Looking at the ETF tracking SPACs, SPAK, it jumped as much as 33% from inception in late September to mid February before retreating from those highs. The ETF fell about 25% since that peak. 

An ETF is an exchange traded fund that tracks a sector, index or commodity, and investors can buy and sell them like regular stocks.  

The SPAK ETF is a diversified portfolio of SPACs, with 60% of the holdings companies that went public through a SPAC and the remaining 40% companies that have not yet merged with another company. Some of the biggest holdings include companies that successfully went public through a SPAC: DraftKings, Skillz and Virgin Galactic.  

The excitement surrounding SPACs is still relatively high but has been fading in recent weeks, as U.S. treasury yields rose, and growth stocks took a beating as a result. Investors have been hyper-focused on the pace of the recent sharp rise in yields. While it signals investor optimism in a strong economic recovery, it also increases returns from government bonds and thus makes high-growth risky trades less attractive. Bonds are often considered much safer investments than equities. 

While it may seem to be a good idea for smaller media companies to go public through a SPAC, many still consider them to be a speculative investment. More investors are willing to pour money into speculative trades when things are good, but the real test will come when the broader market outlook isn’t as hot as it is now.