When special purpose acquisition companies (SPACs) first emerged in 2010, they were promoted by banks and other investors as legitimate finance vehicles to help private companies raise capital in the stock market. For the next seven years, the number of new SPACs grew slowly but steadily, raising less than $10bn per year. It wasn’t until 2020 and even 2021 that SPACs took off, raising more capital than all previous years combined.
But today, the excitement over SPACs is waning, and criticism among academics, practitioners and the financial press is mounting. Why? As information regarding the returns to different SPAC investors becomes available, we are learning that SPAC sponsors and hedge funds who participate in the SPAC initial public offering (IPO) do very well, while retail investors who buy shares when a merger is announced and hold past the merger period do very poorly. Also, it turns out that SPACs have some serious character flaws.
