SPAC Froth Turns on Itself With Stocks Plunging 20% in Two Weeks

It may turn out that five new special purpose acquisition companies per day was too many.

SPAC mania is showing signs of hitting a stock-market saturation point, with an index tracking blank-check flyers suddenly down about 20% from its peak. The craze is being clipped as quickly as it whipped up, with sentiment souring on growth stocks amid a runup in interest rates and rotation into beaten-down names. Before the selloff, SPACs had almost doubled since October.

“When the price is moving up way faster than fundamentals can justify, that screams risk to us, and people who have those exposures are experiencing that risk today,” said Matt Stucky, portfolio manager at Northwestern Mutual Wealth Management Co. “It’s an awfully risky proposition to have a lot of capital invested in an exposure that is pretty volatile.”

The group’s meteoric growth has come to symbolize speculative behavior in equities. SPACs surged as famous executives, athletes, private-equity giants and venture-capital firms alike rushed to raise money for yet-to-be identified future investments, tapping appetite for early-stage companies. In the first two months of 2021, 175 SPACs sold initial public offerings, or roughly five deals per trading day, according to data compiled by Goldman Sachs Group Inc.

In February alone, 90 SPACs raised $32 billion, a monthly record. Should the current pace of issuance persist, this year’s offerings will surpass the full-year total of 2020 before the end of this month, Goldman Sachs strategists led by David Kostin estimate.

“The blistering pace of issuance is likely unsustainable,” they wrote in a note this week.

The pace of money raising from SPACs has far exceeded the heydays of traditional IPOs during the dot-com era. In terms of dollars, SPAC issuance has been running at a clip of $28 billion a month, Goldman data show. In 1999 and 2000, companies raked in an average $5.4 billion a month through initial offerings, according to data compiled by Jay Ritter, professor of finance at the University of Florida’s Warrington College of Business.