More Evidence of How Frothy SPACs Can Be

As special purpose acquisition companies come under growing scrutiny, one basic calculation that was off the mark for some of them is calling into question all other projections: the interest income the companies said they expected to earn on their cash.

At least nine SPACs, including some tied to billionaire William P. Foley II and Apollo Global Management, have indicated since April 2020 that they anticipated earning 1% or more on the cash they raised before spending it on acquisitions. That’s roughly 10 times the average yield over the past year on Treasury bills, the ultra-safe securities where the money is typically parked -- either directly or via money-market funds -- while SPACs shop for a target.

As a result, the interest reported so far is only a fraction of what the SPACs initially told investors they expected, yet couldn’t guarantee. Pre-merger interest income is not likely a top priority for many caught up in the rush to capitalize on this once-euphoric corner of the market. Still, with the low levels of T-bill yields common knowledge, the assumptions raise questions about the accuracy of other projections made in the world of SPACs.

“Anyone tracking the Treasury market could have figured out that a 1% rate was just not going to happen,” said Pratap Narayan Singh, who advises private-equity investors on SPACs for London-based Acuity Knowledge Partners. “Once you lose confidence in the interest-rate calculation, which is a basic thing, then you lose confidence in everything else.”

The issue risks adding to a growing list of problems piling up elsewhere in the world of SPACs -- everything from a crackdown by the Securities and Exchange Commission to lawsuits from shareholders, falling share prices, delays in planned listings and repeated stumbles over the same accounting error. Even Chamath Palihapitiya, founder and chief executive officer of Social Capital and one of the most prominent players in SPACs, believes more oversight and regulation is needed. Gary Gensler, the SEC’s new chairman, appears willing to go down that road.

SPACs are obligated to invest initial public offering proceeds in risk-free instruments as they look for acquisition targets. While that includes money-market funds with Treasury obligations offering marginally higher yields, it often means buying securities in the front end of the Treasuries market -- one of the safest, interest-bearing places to be -- during the 18 to 24 months it could take to find and complete a merger.