Despite being banned from popular platforms like Facebook (FB) and Twitter (TWTR) , former president Donald Trump shook up the social media space over the past week.
However, his shakeup has the chance to spread further for investor sentiment. Nowhere is this more evident than in the renewed interest in special purpose acquisition companies, or SPACs. Google search interest in SPACs has soared in the past week, reaching its highest level since February, a period wherein the SPAC bubble was at its fever pitch.
Now, after a significant cool-down for SPACs from that point, the tide may be turning. Indeed, as popular online gaming company FaZe Clan Inc. is set to debut at a $1 billion valuation via a SPAC offering, the "Trump bump" may have been a pivot point for overall SPAC popularity.
In terms of those eyeing SPAC investments, Trump still wields a good deal of clout.
In a press release on Oct. 20, SPAC Digital World Acquisition Corp. (DWAC) announced that it would merge with Trump Media & Technology Group to form a company valued at $1.7 billion. While the former president offered a typically bombastic statement on "the fight against big tech" in the announcement, Patrick F. Orlando, Chairman and CEO of DWAC, was more pragmatic in his vision for the move.
"Digital World was formed to create public shareholder value and we believe that TMTG is one of the most promising business combination partners to fulfill that purpose," he said. "Given the total addressable market and President Trump's large following, we believe the TMTG opportunity has the potential to create significant shareholder value."
The market certainly saw that potential, pushing the SPACs stock price to the proverbial moon. In fact, even after being cut in half since its Friday peak, the stock has still marked about a 500% gain since the announcement.
While the initial focus may have been on Trump's social media pursuits, the optimism may well permeate through to SPACs as an investment vehicle overall.
"I do think that DWAC and former President Trump's presence and the public interest in his business engagements drew attention from investors and the general population," Sylvia Jablonski Kampaktsis,Co-Founder and CIO at Defiance ETFs, told Real Money. "Therefore DWAC was on fire post announcement due to its link to [Trump] and his business endeavors...and so was the interest in SPACs."
Kampaktsis added that as stocks like Tesla (TSLA) continue to soar and investors seek hyper-growth tech investments, SPACs will continue to trend as a vehicle to tap into such opportunities.
"If an investor believes that the market is going to pull back and have healthy, yet not high double digit returns, and is really looking for that next sexy 5G, Tesla, Space related type of trade, look no further than SPACs which tend to focus on emerging and exciting sectors," she explained. "Stocks like DraftKings (DKNG) , Opendoor (OPEN) , Desktop Metal (DM) , and Virgin Galactic (SPCE) stem from them. SPACS are likely to produce the next generation of technology stocks."
Regulatory Risk Remains
To be sure, the "sexy" opportunity perhaps available via SPACs as an investment vehicle is matched by their regulatory risk as the SEC adds scrutiny to SPAC sponsors and a spate of lawsuits still populate court dockets.
In May, the oversight body warned investors against investing in celebrity-led SPACs and highlighted issues inherent in the structure of SPACs, especially with regard to warrants. Additionally, the SEC has not been reticent to beef up regulatory oversight on accounting practices for SPACs.
It is not the only oversight body observing these vehicles more closely either, as FINRA updated its guidance on SPACs earlier this month while citing the vehicles as a key topic for its October Investor Bulletin.
The risk is not resigned to regulators either, as lawsuits could lead to headaches for SPAC investors.
Per insurance brokerage Woodruff Sawyer, lawsuits filed against blank-check companies have quadrupled since 2020. In line with this litigation risk, the firm notes that insurance premiums for directors and officers of SPACs have increased about five-fold since the first quarter of 2021.
Yelena Dunaevsky, Vice President of Transactional Insurance at the firm, remained optimistic on the SPAC space as able to serve a fruitful purpose both for investors and the market overall. However, she was quick to acknowledge remaining risks looming over the space, perhaps paradoxically increased by the popularity of the Trump-linked listing. In her view, another high-profile failure could pose a problem for SPACs overall.
"SPAC teams that have been on the sidelines waiting for the market to turn are eager...we might see a fairly busy rest of Q4 and even Q1 of 2022," Dunaevsky forecasted. "Unless the Trump SPAC craziness, which is not reflective of most SPAC deals, torpedoes the rest of the SPAC market."
The Primacy of Prudent Management
In the end, SPACs rely upon the ability of a management team. For the vehicle's success overall, the prudence of these executive offices is equally important.
In this sense, Saurabh Gupta, co-founder of Singapore-based SPAC Vistas Media Capital said that the cool-off period over the summer was overall good for the space and the market, as excesses had become readily apparent.
"While there has been a surge in SPAC IPOs since 2020, there have also been a series of business combination announcements that have raised an alarm with the regulators and resulted in retail investors losing money," he admitted. "Sponsors and their affiliates need to conduct thorough due diligence across multiple parameters which requires time and resources and not be in a rush to announce the businesses, purely for their own short term economic gains or because of time pressure to conclude a deal within a specific time frame."
Gupta added that the space should be much healthier overall as the number of overly-speculative SPAC sponsors focused on short-term returns has been thinned in recent months.
However, as with almost all investments, the ultimate responsibility lies with the investors themselves. After an acrimonious end to the SPAC hot streak early in the year, investors might yet be more discerning. If the flow of SPACs to market remains below the feverish pace of the past year, this may be an easier proposition.
Nina Kelleher, Director at EisnerAmper and national leader of the firm's SPAC services, suspects that a stabilization is still under way and that this is ultimately a healthier environment for investors.
"When it comes to overall activity, it's important to keep in mind that there are still a number of SPACs in the market that need to identify targets. It's actually quite understandable that the buzz has slowed down because we saw so many launches over the last 18 months," she told Real Money. "As excitement around SPACs is stabilizing, it becomes more predictable for investors to target how a company will perform."