Writing blank checks is not what stock markets are for
I have this great idea that will make a lot of money. I cannot tell you what it is yet, nor can I tell you when you will earn those life-changing millions. But I am a decent bloke and you can trust me, so give me a lot of cash and you will not regret it — I promise.
That does not sound like much of an investment strategy, does it? But that is the basic pitch currently doing the rounds on Wall Street and overblown Western financial markets. Asian investors are getting in on the act, and it can only be a matter of time before the craze hits the Middle East.
“Give me some money and I’ll give you more back” is the mantra of sharp financial operators since time immemorial, but it has been given a new lease of life in the concept of special-purpose acquisition companies (SPACs).
Sometimes known as “blank check” companies, these entities have been around in some form or other for a long time, but have made a resurgence in the extraordinary financial and economic times we are in.
The principle is this: A renowned investor with a high public profile and a reputation for canny financial dealings declares that he or she will launch an initial public offering (IPO) on a public stock exchange and invites participation — in the form of share subscriptions — from the public.
The legendary investor is not selling any assets in the IPO. There are no operational businesses, like an industrial company or a new consumer service for sale. There is not even an app. The SPAC merchant is selling his or her reputation, and the pledge that those who take up the offer will make a lot of money. If they do not, the promise is they will get their cash back.
They will make money by buying a private business and giving it a market value. The SPAC man’s investment expertise is trusted to ensure that value is more than the cost of the acquisition, and everybody is happy.
It is all the rage on Wall Street, which has raised nearly $30 billion so far this year for SPACs. Some of the best-known names in American business are behind this wave of blank-check investment, and they have been encouraged and assisted by some of the biggest investment banks in New York, which have been making a lot of money out of the fees from the IPOs.
Despite the COVID-19 pandemic, IPO markets have actually been pretty good so far in 2020, in the Middle East as well as the US. About 20 percent of all the IPO money raised on Wall Street this year has come from SPACs.
The main reason for this burst in optimistic investment is the vast amounts of public money that have been pumped into capital markets in the US, in an attempt to head off a possible financial crash on the heels of the deep economic recession caused by lockdowns worldwide.
The SPAC man’s investment expertise is trusted to ensure that value is more than the cost of the acquisition, and everybody is happy.
Publicly listed valuations of real companies, especially in the hi-tech sector, have got so expensive that hot money is chasing investment opportunities wherever it can find them.
Do not get me wrong — I am not suggesting that the SPAC practitioners are doing anything wrong. There is a reason why billionaires became billionaires in the first place, and they certainly have a track record of finding investment opportunities and adding value.
But I would question why they have to do it on public markets, and with other peoples’ money, when they have plenty of their own.
This is not what public markets are intended for. The basic purpose of stock markets is to facilitate capital flows into economic growth via rational, asset-backed investment opportunities, not to fund somebody’s hunches, however expert these might be.
Like share buybacks, SPACs can be seen to be one of those barnacles of advanced 21st-century capitalism that are bringing the whole game into disrepute, and which could further inflate the global financial bubble at the worst possible phase of the economic crisis.
- Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai