- The special-acquisition company frenzy is being driven by unrestrained speculation and may not yield expected returns, Bloomberg reported legendary short-seller Jim Chanos as saying.
- History shows so-called “blank-check” companies do not perform well, but a burst of speculation has brought them back into focus, Chanos said at a conference on Tuesday.
- Chanos criticized companies for putting aside metrics such as revenue and earnings, and focusing instead on the total market size they can win.
- He said the idea is “how big is what you’re chasing, forgetting for a second that everybody else is chasing those same markets.”
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The boom in SPACs is driven by heavy speculation and may not produce expected returns, as these investment vehicles don’t perform well historically, Bloomberg reported short-seller Jim Chanos as saying.
“We are going to blow through the records of 1999 and 2000 in terms of new issuance,” Chanos said at a conference in New York on Tuesday. “We are now seeing speculation in all its glory come back.”
SPACs, special purpose acquisition companies, are also known as “blank check” companies, and are created specifically to take a company public, without going through the traditional process for an initial public offering. Their use has exploded this year.
Chanos, who made his name forecasting the downfall of US energy giant Enron, said “academic work has showed us that the return of special purpose acquisition companies is not only bad relative to the stock market, it’s even worse than initial public offerings. That hasn’t stopped people from getting excited and throwing money.”
Chanos, also the founder of New York-based investment management firm Kynikos Associates, said companies are, wrongly, setting aside metrics such as revenue and earnings, and focusing instead on the overall market size they can gain.
About $57 billion has been raised across 151 SPAC IPOs in 2020 so far, according to SPACInsider.com, more than triple last year’s $13.6 billion in proceeds through 59 deals.
A list of high-profile investors including Bill Ackman, Chamath Palihapitiya, Richard Branson, Rajeev Misra, Shaquille O’Neal, and Martin Luther King III have hopped onto the SPAC bandwagon this year.
The problem, Chanos said, is looking at “how big is what you’re chasing, forgetting for a second that everybody else is chasing those same markets.”
He pointed to the example of video-streaming pioneer Netflix which believes its total market is “all the people on the planet.” The company fell short of subscriber-growth targets in the third-quarter after initially posting a massive growth spurt earlier this year.
Chanos joked that he would “go long any of the space companies that have gone public because we know that space is infinite. There’s no price too high to pay.”