How the SPAC Era Will End

A fever has swept Wall Street, and it’s stretching all the limits

Heather Perlberg

Whenever greed meets reality and giddy markets collapse, Wall Street pros usually say they sensed the end was coming. The warning signs were so familiar, they belatedly confess, that it was difficult to believe anyone could miss them. The chain of fools was running out.

This can’t last. Today those sober words are being whispered again in American finance, this time about one of the biggest money grabs in the business, SPACs. Once dismissed as sketchy Wall Street arcana, these publicly traded shells are created for one purpose: to merge with real businesses that really make money. Nowadays everyone who’s anyone seems to be doing one, from Alex Rodriguez to Paul Ryan. The count from the past 15 months stretches to 474 SPACs. Together they’ve raised $156 billion.

Picture GameStop Redditors meet The Wolf of Wall Street, and you get the idea. The celebrity-studded spectacle will prove that either SPACs—officially, special purpose acquisition companies—are transforming the way finance gets done or the market mania is spiraling out of control. Maybe both.

Privately, and increasingly publicly, financial professionals warn this will end badly for the investing public. To cynics, the only questions are when and how badly. More and more members of the SPAC ecosystem—a matrix of hedge funders, private equity dealmakers, bankers, lawyers, and assorted promoters—see the excesses building. They point to you’ve-got-to-be-joking valuations, questionable disclosures, and, most worrisome, a growing misalignment of interests.

On one side of the divide are the people minting SPACs and getting rich now. On the other side are the people buying into them and hoping to get rich later.

The bad omens are all around. A private equity executive who was eyeballing a list of about 20 SPACs, a mere week’s worth at the time, told me he figured five might be worth investing in. An analyst at a major bank told me he’s thinking about doing a SPAC. He asked, half-joking, if I wanted in. “It’s just so easy,” he told me.

How did we get here? Short answer: slowly, and then all at once. SPACs, also known as blank-check companies, first emerged in the 1980s and for a long time were relegated to the pink sheets, where penny stocks lurk. Until recently, they were viewed mostly as a last resort for dealmakers looking to raise money.

The pandemic changed all that, as it has so many things. On today’s work-from-home Wall Street, traditional roadshows— those traveling, if-it’s-Tuesday-it-must-be-Dallas sales pitches for new stocks and bonds—have become scarce. Rock-bottom interest rates have fueled the historic “everything rally” in equities, Bitcoin, what have you. Propelled by greed and boredom, millions of amateur investors, cheered on by social media, have piled into meme stocks like GameStop—and SPACs.

The numbers tell the story. In 2019, 59 SPACs raised $13.6 billion. In 2020 those figures leaped to 248 and $83.3 billion. So far this year, the totals are already 226 SPACs and almost $73 billion, with SPACs making up more than 70% of the market for initial public offerings. Along the way, such prominent financial players as Apollo Global Management Inc. and KKR & Co. have lent SPACs the legitimacy they long lacked.