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The median return of 2022's SPAC mergers: -82%

pranshum.yarn.tech

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Re: The median return of 2022's SPAC mergers: -82%

#61

Post by majormajor »

bko wrote: post #58
Ozzie_osman wrote: post #41

Earlier quoted context omitted.

The interesting thing is a few years ago (before becoming the "SPAC King") he did a media tour where he criticized Venture Capital as being a "massive Ponzi scheme". [1] Then he went all-in on SPACs... Which ended up being the ultimate Ponzi. [1] https://www.cnbc.com/2018/10/10/start-up-economy-is-a-ponzi-...

How are SPACs a ponzi? My understanding is that its a pool of money that gets raised to essentially take a private organization public through a merger with (theoretically) less red tape and cost. You buy into the SPAC without knowing exactly what is being bought but at the time of purchase you have the option to redeem you investment. There are other clauses if the organizer can't find a suitable takeover target. Yo…

SPACs make it easier to get the next round of money for your Ponzi with less due diligence needed (where Ponzi is used in the loose sense of "there's no long term real business model, just sell it off to the suckers before it blows up").

So, sure, more accurate to say "SPACs make passing laughable-business-plan Ponzi schemes off as real businesses and cashing out to public investors" than "SPACs are ponzis directly" but... I'm not sure this hair needs splitting.

Re: The median return of 2022's SPAC mergers: -82%

#62

Post by epgui »

Ozzie_osman wrote: post #41
hn_throwaway_99 wrote: post #24

I'm always somewhat amazed that Chamath Palihapitiya doesn't have a much worse reputation: 1. My understanding is that he was the primary initial architect of "A/B testing for engagement" at Facebook that turned social media into a tribalistic, outrage generating machine (nothing engages like hate), and that the rest of SV essentially copied. I think this trajectory would have happened regardless, but he was first, s…

The interesting thing is a few years ago (before becoming the "SPAC King") he did a media tour where he criticized Venture Capital as being a "massive Ponzi scheme". [1] Then he went all-in on SPACs... Which ended up being the ultimate Ponzi. [1] https://www.cnbc.com/2018/10/10/start-up-economy-is-a-ponzi-...

Not everything that is a bad investment is a Ponzi scheme.

Re: The median return of 2022's SPAC mergers: -82%

#63

Post by baby »

canvascritic wrote: post #2

SPACs, in theory, democratized access to late-stage private markets, aiming to give retail investors an early seat at the table. but like many financial innovations, they're tools that can be wielded wisely or poorly. the high failure rate suggests a misalignment of incentives: founders and sponsors capture immediate liquidity, while long-term outcomes get obfuscated by the structure. I once had a chat with a founder…

SPACs really are hacky legal loophole right?

Re: The median return of 2022's SPAC mergers: -82%

#64

Post by epgui »

majormajor wrote: post #61
bko wrote: post #58

Earlier quoted context omitted.

How are SPACs a ponzi? My understanding is that its a pool of money that gets raised to essentially take a private organization public through a merger with (theoretically) less red tape and cost. You buy into the SPAC without knowing exactly what is being bought but at the time of purchase you have the option to redeem you investment. There are other clauses if the organizer can't find a suitable takeover target. Yo…

SPACs make it easier to get the next round of money for your Ponzi with less due diligence needed (where Ponzi is used in the loose sense of "there's no long term real business model, just sell it off to the suckers before it blows up"). So, sure, more accurate to say "SPACs make passing laughable-business-plan Ponzi schemes off as real businesses and cashing out to public investors" than "SPACs are ponzis directly"…

It's not hair-splitting, a SPAC is simply not a Ponzi scheme. That doesn't mean it's a good investment.

Re: The median return of 2022's SPAC mergers: -82%

#65

Post by mlyle »

epgui wrote: post #64
majormajor wrote: post #61

Earlier quoted context omitted.

SPACs make it easier to get the next round of money for your Ponzi with less due diligence needed (where Ponzi is used in the loose sense of "there's no long term real business model, just sell it off to the suckers before it blows up"). So, sure, more accurate to say "SPACs make passing laughable-business-plan Ponzi schemes off as real businesses and cashing out to public investors" than "SPACs are ponzis directly"…

It's not hair-splitting, a SPAC is simply not a Ponzi scheme. That doesn't mean it's a good investment.

SPACs may not always be ponzi schemes, but plenty are of dubious, unvetted businesses and for the principle purpose of paying returns to prior investors.

Re: The median return of 2022's SPAC mergers: -82%

#66

Post by ethbr1 »

canvascritic wrote: post #2

SPACs, in theory, democratized access to late-stage private markets, aiming to give retail investors an early seat at the table. but like many financial innovations, they're tools that can be wielded wisely or poorly. the high failure rate suggests a misalignment of incentives: founders and sponsors capture immediate liquidity, while long-term outcomes get obfuscated by the structure. I once had a chat with a founder…

https://en.m.wikipedia.org/wiki/The_Market_for_Lemons

If there exist two pathways:

   1. Regulated, standardized
   2. Less regulated alternative
Which sort of companies are going to dominate in #2?

It's not going to be the ones that could have gone with #1, but decided not to for reasons. It's going to be a lot of companies that couldn't go with #1.

Which will drag down the median of #2, which will increase the cost of using it (because everyone will assume you're a scam by default), which will decrease its attractiveness and cause even more companies who can to pursue #1, GOTO 10.

Re: The median return of 2022's SPAC mergers: -82%

#67

Post by epgui »

pavon wrote: post #29

For some context, looking at traditional IPOs during the same year[1], the median return was 3.3%, the mean -22%. Like SPACs there were a couple outlier that gave high returns. Around 45% of IPOs gave small positive returns, while only 4% of SPACs did. Around 35% of IPOs lost half their value or more, while 80% of SPACs did. [1] https://stockanalysis.com/ipos/2022/

Much needed perspective! (it's still not a great track record, but it feels more proportional)

Re: The median return of 2022's SPAC mergers: -82%

#68

Post by epgui »

javajosh wrote: post #11

I'm new to the term SPAC and had to look it up. https://www.investopedia.com/terms/s/spac.asp Based on the definition, is it proper to call it a "merger"? It seems more like what SPACs do is "acquire".

In practice and in effect, it's more like a lightweight IPO that skirts around the rules meant to protect investors. Like an IPO, but way riskier.

Technically there is a merger that does happen, but... it really is a technicality.

Re: The median return of 2022's SPAC mergers: -82%

#69

Post by epgui »

mlyle wrote: post #65
epgui wrote: post #64

Earlier quoted context omitted.

It's not hair-splitting, a SPAC is simply not a Ponzi scheme. That doesn't mean it's a good investment.

SPACs may not always be ponzi schemes, but plenty are of dubious, unvetted businesses and for the principle purpose of paying returns to prior investors.

Yes, but that's only superficially similar to a Ponzi scheme. They're just not Ponzi schemes.

Re: The median return of 2022's SPAC mergers: -82%

#70

Post by eigenvalue »

This is one of those things that was just totally obvious to professional market participants while it was happening. I was working as an investment analyst at a huge ($10b+ AUM) hedge fund at the time and couldn’t believe the insanity and greed that was being displayed daily by SPAC sponsors and “investors”.

Often the way this game worked was that if you were a large institutional investor who could be relied on to take a large allocation of the shares, you got special treatment and then could dump your shares on unsuspecting (and highly irrational) retail investors, at least while the insanity continued. It was fascinating to see how a bunch of professionals, who should have known better, each of whom were acting rationally (if not exactly ethically, although it was basically all totally legal), could nevertheless result in totally crazy malinvestment and capital destruction.

Of course, it was all possible only because of uninformed retail holding the bag of worthless companies like Virgin Galactic, or real companies that were valued at silly levels because they were SPACs. It was amazing too just how many times the big SPAC sponsors (like Chamath, but also Alec Gores, Michael Klein, etc.) "went back to the well" to do the same thing again and again. The most egregious of all of these that I'm aware of is David Hamamoto, who did the SPAC deal for Lordstown Motors, which was basically an outright fraud (I shorted this one to the bottom in size at the time).

Sadly, I doubt any of the people responsible for these huge losses by the public will ever be held accountable in any way, nor will the legions of professionals (lawyers, accountants, investment bankers, etc.) who enriched themselves while facilitating what they must have known were guaranteed duds for whomever would be left holding the bag (i.e., stupid retail investors losing their meager life savings.)

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