"My mate Randy said to me, 'Draft Kings is going to go public, it's merging with a Spac and the market is going to love it.' I tell him, 'a Spac, what is this thing?'
You invest early and pick up the package after. "
This is one of the verses of the last song by American rapper Cassius Cuvée, put online at the beginning of February, in which he declares his love ... to a complex financial instrument which is currently all the rage in the United States.
All in front of a Tesla and with a bottle of champagne in hand.
Cassius Cuvée has invested more than $ 500,000 since March 2020 in these financial vehicles, he told the Wall Street Journal, Thursday, February 18.
And he is far from being the only one interested in it.
The Spacs are the common point between the French multibillionaire Bernard Arnault, the former basketball star Shaquille O'Neal, the American football player and activist Colin Kaepernick or Gary Cohn, the former economic adviser to Donald Trump.
"If you don't have too much Spac, you're nobody"
Forget the injunctions to have a Rolex at 50.
On Wall Street, today, it is rather "if you do not have your own Spac, you are nobody", summarizes Peter Atwater, founder of the economic research firm Financial Insyghts, interviewed by the Wall Street Journal.
There are, on average, five new Spacs that have been created every working day since the beginning of the year, calculated the economic daily of the East Coast.
So, to paraphrase rapper Cassius Cuvée, "what is this thing?"
Spacs - or Special purpose acquisition companies - "are essentially empty financial shells that go public on the promise made by the founders of Spac to investors to find a private company to buy", explains Alexandre Baradez, head of economic analyzes for the financial consulting firm IG, contacted by France 24.
It is a multi-step process.
First, individuals, generally financial professionals or recognized business leaders, found Spac, then they carry out an IPO by selling potential investors their "vista" to find the future rare pearl, then they find it and redeem it.
At the end of the day, Spac and the company thus acquired merge and it is the latter which becomes the listed group.
These Spacs have a nickname on Wall Street: the "blank check companies".
No wonder, since "it is a very speculative bet on the know-how of those who issue the Spacs", notes Alexandre Baradez.
“The pitch of these Spacs creators could not be simpler: 'I'm a famous person in my industry, I want to buy something, trust me and give me your money',” summarizes CNBC.
They then have two years to identify a start-up with which to merge.
Otherwise, they are required to reimburse all investors.
Spac vs classic IPO
This confidence seems to reign in the financial markets at the moment.
In just one month, in January, these obscure stock market objects of desire managed to raise $ 26 billion, or nearly a third of the total amount raised in 2020, which had already been a record year for Spacs.
These funny stock birds are nothing new.
At the time of the 2008 financial crisis, they were seen by start-ups as alternatives to traditional IPOs deemed too risky in a gloomy financial context.
The Spac is, in fact, a "simpler, faster and less expensive way to be listed", notes Alexandre Baradez.
All the tedious work of paperwork and convincing investors to go public has already been done by Spac.
You just need to agree with the creators of this financial vehicle on an acquisition price, and the start-up is ready to go.
They then lost their appeal in favor of traditional IPOs when the economy recovered.
The traditional procedure "has the advantage of giving more media exposure to the company that wants to make its debut in the financial markets and when investors are confident, one can expect to raise more money", explain two economists from New York University in a study on the current popularity of Spacs published in November 2020.
The Spacs do not enjoy a very flattering reputation either.
"Whatever the know-how of their creator, I do not know any worse in terms of transparency," said Arthur Levitt, a former director of the Security Exchange Commission (SEC, the American gendarme of the Stock Exchange in the early 2010s). ).
Start-ups are not, in fact, obliged to lay bare their accounts as during a traditional IPO and the negotiations on the merger are done out of sight.
Their current upturn in popularity is very much due to the Covid-19 pandemic.
They began to bloom in the spring of 2020, when the global economy came to a halt because of the containment measures.
This is in part due to the fact that investors anticipated a repeat of the 2008 financial crisis, CNN said.
Appetite for risk
But the Spacs are also driven by the same phenomenon that was at the origin of the GameStop affair.
"This is due to the context of money flowing freely - thanks to measures to support the economy and very low rates - and to all the savings that individuals seek to invest," said Alexandre Baradez.
Investors must find investments for their fund.
And "as everything goes up [stocks, cryptocurrency, etc.], there is a greater appetite for risk which pushes investors to bet on Spacs", specifies the analyst of IG.
In addition, there are more and more Sunday stock marketers, as the excitement around the GameStop action has shown.
Cassius Cuvée is not the only amateur investor to get carried away with Spacs.
On Twitter or YouTube, there is a host of accounts, like Dr Spac or SpacWatch, which promise wonders to all those who would bet on these investments.
The Spacs have, in fact, always been considered "the poor's IPOs".
"Traditional IPOs are largely inaccessible for small investors, while there is no barrier to investing in a Spac," said Alexandre Baradez.
A share of a Spac typically costs $ 10.
Everyone then hopes that the promoters of these funds find the next Tesla (electric cars are one of the most popular themes among current Spacs) which will turn their initial stake into the goose that lays the golden eggs.
Bubble ready to explode
But, it is also a very risky financial adventure.
"It is already a bubble which is ready to explode", judge Ivana Naumovska, an economist from the European Institute of Business Administration (Insead), in an article published on February 18 by the American journal Harvard Business Report.
"There is, in fact, an overheating of the sector", confirms Alexandre Baradez.
For him, there are simply not enough promising start-ups for the number of Spacs.
There will therefore inevitably be some who will fail to find their target and others who will merge with companies which, in the end, will disappoint the markets.
And that's what is starting to happen.
Nikola, the maker of electronic trucks, made a strong impression when it floated on the stock market after being bought out by a Spac in June 2020. But the honeymoon did not last and the share price collapsed by more than 25% in three months, provoking collective action by several small shareholders who accuse the group of having deceived them about the effectiveness of their technology.
All these amateur stock marketers risk quickly realizing that these Spacs are generally not very profitable.
A study of 89 IPOs by Spacs since 2015, carried out by the investment fund Renaissance Capital, showed that they were, on average, losing money to investors.
When will Cassius Cuvée's next song explain that "Spacs is a scam, you shouldn't go because it wastes wheat"?
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