“ Each of them has increased ”

PSPC’s red market is getting even hotter in 2021, raising concerns about rampant speculation detached from the reason that could leave retail investors fresh out of GameStop’s bust holding the bag.

Not only are special purpose acquisition companies raising a record level of capital – more than $ 30 billion so far for its biggest quarter in history – pre-merger PSPCs are also experiencing outsized pop on the first day of negotiation.

New trades this year have seen an average jump of 6.5% from their debuts, almost six times their historical levels (from 2003 to 2020, the average return on the first day of IPOs n is only 1.1%), according to the University of Jay Ritter, professor of finance in Florida.

“Each of them has gone up in price. It’s not driven by one or two outliers,” Ritter said.

Unlike traditional IPOs where early jumps are generally seen as a sign of healthy investor appetite and a bullish market environment, PSPC’s initial rallies are less rational in nature. These blank check companies are empty corporate shells that raise money from investors, then merge with a private company within two years, while also making them public.

So when yield-hungry investors raise the prices of blank check transactions, they are essentially taking a leap of faith by betting on something without a valuation or an actual business. Many believe that the SPAC price hike could be a sign of speculative behavior in a new bull market with massive liquidity and out of control animal spirits.

“There is a lot of money in the market,” said JJ Kinahan, chief market strategist at TD Ameritrade. “This lends itself to people outside the S&P 500 or Nasdaq 100. You will continue to see this behavior just because people are looking around to see what else is there besides buying them. same stocks that everyone else buys. “

There are signs that the PSPC boom is caught in the market frenzy fueled by retail traders. Bank of America’s customer flows showed retail investors accounted for 46% of PSPC transaction volume on its platform in January, up from around 30% two months ago. By comparison, retail customers represent only about 20% of S&P 500 transactions on the Bank of America platform.

“The speculative nature of PSPC appears to be particularly attractive to retail,” Bank of America analysts said in a note. “We certainly don’t need to remind anyone what can happen when something speculative hits the retail radar (ahem, GameStop).”

There is an appeal to getting a first party of a PSPC deal for many retail investors looking for high growth start-ups. However, given that the majority of individual investors buy PSPC common stock on the open market, they would likely miss the day one pop. Additionally, many brokers do not offer trading in PSPC warrants, which is a sweetener that provides early-stage investors with better pay for their money.

In fact, for buy and hold investors who only come in after a deal is made, they almost always lose money.

For the 114 companies that went public through PSPC mergers over the past 10 years, investors lose 15.6% on average if they buy the common stock of a merged company on the first day of trading and hold them for a period of time. an, according to Ritter. And they lose 15.4% on average if they hold the shares for three years.

However, that is a different story for institutional investors. Hedge funds and other players who participate in PSPC IPOs are often able to secure an offer price of $ 10 plus the benefit of the warrants. They also tend to sell stocks after the merger is completed, which could have a negative impact on prices.

“Institutional buyers saw this was a good deal,” Ritter said. “PSPC’s IPOs are basically undervalued default-free convertible bonds. The worst they can do is $ 10 plus interest, and no one has lost any money.”

Another worrying factor is the large number of target trades at the moment. A record of over 300 outstanding PSPCs is being researched, giving private firms more bargaining power and allowing them to play investors against each other for better valuation.

“Valuations have of course become increasingly competitive,” said Soumya Sharma, corporate lawyer at Troutman Pepper. “The reason this is going to survive is that high-end targets agree to merge with PSPCs because they believe they are better valued.”

As the valuations of target companies rise, this reduces the upside potential for PSPC investors. Meanwhile, sponsors could be competing for substandard companies, many of which have yet to produce a physical product.

“The past two months have been great for PSPC investors with very high returns, but I don’t think it can continue like this,” Ritter said.

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