The Spac boom will give investors “a rather expensive lesson” as the race to IPO via blank check vehicles creates “castles in the sky,” a leading short seller warned.
Jim Chanos, who remains best known for predicting the collapse of the energy group Enron, accused some of those who made public companies through Spac of “playing fast and freely with their projections” in an attempt to attract retail investors.
Kynikos Associates, the 63-year-old-founded hedge fund, is betting against a number of Spac companies that are “really bad companies” and whose valuations “have gotten stupid,” Chanos said. He refused to name them.
The criticism comes as scandals at several leading Spac companies begin to dampen the euphoria generated by a boom that began last year and accelerated earlier this year.
U.S. electric truck maker Lordstown Motors warned this month that his company could run out of money despite previously saying it has enough money to build its flagship vehicle. Rival Nikola, who went public in June 2020, also took a close look at several of the claims he made about his technology.
“You are now seeing all kinds of situations that would probably not be accepted in the IPO process and become public through the Spac machines,” Chanos said.
“As the boom continues, we suspect more and more companies are playing. . . fast and loose with their projections in order to encourage investors to commit capital.
Spaces, or special purpose acquisition vehicles, raise funds from investors via a listing on the promise to merge with a real business. Over the past 18 months, blue-chip mutual funds, private equity firms and individual investors have invested money in it.
They’ve raised $ 100 billion globally from 370 listings this year, according to data provider Refinitiv, and more than 400 Spacs are currently looking for companies to buy.
Companies that go public through a Spac instead of a traditional IPO have greater license to make bold sales forecasts, which has already caught the attention of the Securities and Exchange Commission.
Chanos said the regulator should step in because “it’s [the projections] where investors have stars in their eyes and are prone to losing a lot of money.
The windfall has sparked several prolific sponsors, the name given to the founders of Spac, including former Facebook executive Chamath Palihapitiya, former Citigroup negotiator Michael Klein and Cantor Fitzgerald CEO Howard Lutnick.
Chanos warned of the danger of investors being fooled by reputations, while warning of “smart man syndrome” or “celebrity patina” where top names are tricked into endorsing a agreement.
Sports betting company DraftKings, for example, has added celebrities to its board, including basketball legend Michael Jordan and model Gisele Bündchen.
“You have to be very, very careful when you follow people in things,” Chanos said.
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 took long positions in blank check vehicles that are trading below the $ 10 they quoted before buying a company.
The Spac boom has come alongside a dramatic rebound in US stocks over the past year. The benchmark S&P 500 is up 95% from its low reached in March 2020, when the onset of the pandemic hit markets.
It has proven to be a testing backdrop for short sellers. Although Kynikos bet nearly $ 100 million against German payments group Wirecard, its assets fell below $ 1 billion after peaking at around $ 7 billion following the financial crisis.
There are bubbles beyond Spacs, Chanos said, citing the example of Torchlight Energy, an American company that started life offering pole dance-based fitness classes but has since grown into a producer of pole dance. shale. He is raising funds after his shares have more than tenfold this year.
“Life is rough on the short side,” Chanos said. “If I was a stripper business, but announced a merger, I think I could raise a lot more money than the short sellers right now.”