Friday, January 15, 2021

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There are mini-bubbles everywhere.

The most unique feature of the modern market is how fast everything happens.

As we wrote back in November, the 2020 stock market essentially plotted the entire seven-year journey investors endured around the financial crisis in just seven months.

And as markets have moved to more quickly and efficiently discount all future outcomes, a series of mini-bubbles have become a defining feature of market today.

And it appears SPACs (Special Purpose Acquisition Company) are taking their seat at the table.

George Livadas, portfolio manager at Upslope Capital Management, wrote cautiously about the SPAC space in his fourth quarter investor letter published Wednesday.

“In recent years we’ve seen a number of mini-bubbles come and go rapidly (pot stocks, short vol, blockchain, etc),” Livadas writes.

“We’ve also seen what looks like a general speeding up of broader market regimes (flash bear markets of late 2018 and early 2020). For the SPAC bubble to be exempt from this phenomenon, one must assume that SPACs really are a better, lasting mousetrap vs. traditional IPOs. This seems highly unlikely.”

Livadas also cites impending lock-up expirations and the first full run of detailed quarterly results from many companies taken public by SPAC sponsors as risks for the space. Livadas disclosed that as of the end of the fourth quarter, Upslope was short 11 SPACs and two electric vehicle stocks, all as-yet unnamed.

But even the discussion of SPACs as a sector or asset class unto itself proves the enthusiasm has gone too far.

SPACs are, after all, just a financing scheme, an alternate route for companies to go public that requires fewer disclosures than a traditional IPO or direct listing process. In exchange for this easier process, the company being taken public offers a bigger part of itself for sale to the SPAC sponsor.

Traditionally, this higher level of dilution made SPACs attractive for turnaround stories. Existing shareholders in a business that is struggling are typically more willing to give up an ownership stake in exchange for fresh capital, or a new management team running the company.

Though as Goldman Sachs strategists noted back in December, the sectors now being targeted by SPAC sponsors are no longer beaten down turnaround stories but high growth areas like pharma, tech, and electric vehicles. The SPAC has shifted from being a last resort to a first choice for many companies.