This column was first published in SvD Näringsliv, in Swedish, on April 16th, 2021.

Blank checks worth $100 billion. That’s how much money that has been sent straight into the super hot investment form SPAC just this year. Now the clouds of unrest are rolling in. American investors have begun to question the valuations of the untested companies – and put their hand on the handbrake.

Sweden got its first SPAC less than a month ago. In the US, several new ones are launched every day. This year alone, there are 308 of them worth 100 billion dollars, compared to last year’s 248 or 2019’s 59.

This week another milestone was reached for the investment form that has changed the rules of finance lately. The Uber competitor Grab, based in Singapore, will enter the New York Stock Exchange via the SPAC company Altimeter in a deal that values ​​the company at $40 billion. It places the company in the same order of magnitude as Match Group and Electronic Arts.

This record listing also shows signs of why investors’ enthusiasm has waned.

Altimeter is “only” investing $500 million of the total capital raise of $4.5 billion. The remaining part comes from new investors in a so-called PIPE, or private investment in public equity as it is called.

And it is with PIPE – rather than SPAC – that it has started to get a bit rocky in the market. The initial capital that a SPAC takes in is usually not enough as financing. The model is based, just as in the case of Grab, on first finding a suitable company to merge with, and then getting more capital to be able to complete the deal. However, as PIPE investments are locked up while the transaction is being completed, and also often for a period afterwards too, the the investment is considered illiquid. And, as one banker recently put it to the Financial Times, “there is only a certain amount of illiquid exposure that investors will want.” In other words, there is a risk of the PIPEs running out.

The slowdown leaves many SPAC companies exposed from two different directions.

Firstly, an American SPAC only has about two years to find a good enough and suitable company for its merger. If it doesn’t find anything, it needs to pay back the money to the investors. It raises the question how many suitable companies can be found and that fit this profile in the coming 12-24 months. Secondly, they need to find financing for these deals through a PIPE, which may now prove to be more difficult than expected.

But to better understand why investors are getting a bit cautious, you also need to look at the type of company that is most suitable for a SPAC. What is often mentioned as an advantage for companies is the possibility to move fast and lower overall complexity. The company you are merging with has already gone through the listing process, which means that a large number of formalities have already been completed.

However, there is another – equally, it not more important – variable. It is what Matt Levine at Bloomberg describes as “regulatory arbitrage” – a kind of exploitation of existing legislation.

When an American company is to be listed on the stock exchange, this is done primarily by presenting historical key figures and accomplishments. It describes past financial performance, and indirectly suggests how it may perform in the future. However, issuing clear financial forecasts is often too risky, as investors can sue the company if they do not occur. Sure, the law in question (Private Securities Litigation Reform Act) accepts future-looking forecasts with certain reservations, but these don’t apply to IPOs.

This is where a SPAC is treated differently. As the SPAC company is already listed on the stock exchange, it is thus okay for the new company to market itself with forecasts and promises about the future without any financial history.

The Wall Street Journal, for example, recently listed six electric car companies – all listed with a SPAC – that say they will go from zero to ten billion dollars in revenue within six years. By comparison, that is faster than what Google, Facebook, Amazon and Tesla managed in the same time. SPAC thus opens the door to the stock market for a completely new category of companies – young, innovative, but also basically unproven.

It is therefore not surprising that investors are not entirely convinced of the benefits of these deals. From being a quick shortcut to the stock market, SPAC has now also become a way of listing companies that realistically would never have gotten there otherwise. Without historical financials, it looks more like a venture capital investment, but in a listed environment. Or maybe, as analyst Byrne Hobart called it, simply a call option for hype?

This column was first published in SvD Näringsliv, in Swedish, on April 16th, 2021.