Anyone Who’s Anyone Has a SPAC Right Now

anyone-who’s-anyone-has-a-spac-right-now

A once obscure financial maneuver becomes a celebrity flex.

Credit…From left, Evan Agostini/Invision, via Associated Press; Julio Cortez/Associated Press; Todd Kirkland/Associated Press; Cameron Spencer/Getty Images; Mark J. Rebilas/USA Today Sports, via Reuters; Greg Allen/Invision, via Associated Press

Steven Kurutz

In simpler times, famous-people-turned-entrepreneurs bought wineries or invested in car dealerships — or simply created multi-billion-dollar lifestyle companies on the strength of their family brand.

But in the pandemic economy, there’s a new way for the rich and recognized to flex their status and wealth: through a SPAC. (That’s a “special purpose acquisition company,” but more on that later.)

Jay-Z is involved with one. Shaquille O’Neal has one. Ciara Wilson sits on the board of one, as does Serena Williams.

Sports figures seem especially enthusiastic about them: Alex Rodriguez, Steph Curry and the activist and former NFL quarterback Colin Kaepernick — or should we say, “SPAC-ERNICK” — all have one. So does Billy Beane, the former Oakland A’s general manager and subject of the book and film “Moneyball.”

Websites like SPAC Track and SPACinsider help obsessives keep up on the latest. Political types are getting in on the SPAC action, too. (Former House Speaker Paul Ryan joined one.) And, naturally, there’s a media-crowned “SPAC King” — Chamath Palihapitiya, a former Facebook employee and billionaire investor who posts images of his ripped abs on Twitter and has sponsored six SPACs that raised a total of $4.34 billion, according to Bloomberg.

Perhaps if there was a little more in-person socializing going on, you’d hear people discussing celebrities and SPACs over canapés, and be asked to offer an opinion. At which point you might be saying to yourself, quizzically, what the heck is a SPAC?

Like “leveraged buyout” and “collateralized debt obligation,” SPAC is an arcane Wall Street term that has stumbled into the mainstream lexicon.

SPACs are shell corporations that list on a stock exchange, with the goal of buying a private business and taking it public. In essence, a SPAC is a way to do an I.P.O. without all the time, expense and regulatory oversight traditionally required. The sponsors of a SPAC typically have two years to identify acquisitions or must return their investors’ money.

Everyday investors can put money into SPACs — they are traded on various exchanges — and before the SPAC has bought a company, its funds are typically invested in government bonds.

Also known as “blank check companies,” SPACs have been around in their current form since the 1990s, and for years were viewed as a scam-prone backwater of the finance world, but they have caught fire during the pandemic. And SPAC mania is only growing: SPACs raised $42.7 billion in the first six weeks of 2021, more than half the amount they raised all of last year, according to the Financial Times.

So why are celebrities jumping on the bandwagon? To get richer, of course.

Barry Ritholtz, the chairman and chief investment officer of Ritholtz Wealth Management and a scholar of Wall Street, explained the play. “I imagine that some business manager somewhere says to them, ‘Hey, listen, there’s this hot new financial offering. Let’s put your name and celebrity on it,’” Mr. Ritholtz said. “‘You’re going to bring some fairy dust to a SPAC and the potential upside is tens if not hundreds of millions of dollars.’”

The celebrities aren’t so much the financial decision makers but rather the promoters brought in to attract investors (“strategic advisers,” in prospectus parlance). Like marketers of soft drinks or sneakers, SPAC managers are tapping into the power of celebrity to sell a product — in this case, a financial instrument The New York Times has likened to an “empty shell.”

Hypothetically, let’s say a SPAC prices at $10 a share, and raises $500 million in the public markets. If a celebrity adviser had negotiated 1 percent of that deal, they are rewarded with a stake in the company that is worth $5 million. But now let’s say the same SPAC also finds a successful merger candidate, brings in other investors and a deal is done at $10 billion. The celebrity’s 1 percent stake has netted them (on paper) a $100 million payday.

Basically, celebrities are risking their reputations for, let’s say, a few million dollars initially, “but if it works out, it’s $100 million,” Mr. Ritholtz said. “Humans love asymmetrical risk-reward situations.”

He added, “I can’t believe we haven’t seen a Kim Kardashian SPAC yet.”

Not unlike a stock market boom during a global pandemic, the term SPAC has a silly, absurdist quality to it, lending itself to wordplay: SPAC-tacular! SPAC-tastic! It was a missed branding opportunity that Mr. O’Neal’s investment vehicle was named Forest Road Acquisition Corp and not Shaq SPAC.

The hosts of Bloomberg’s morning show, “Surveillance,” have made SPACs a running joke, since every day brings news of more, along with head-scratching over the speculative mania. “Who are these people? Why would I trust them with billions of dollars?” asked the co-host Paul Sweeney one recent morning. (Many SPACs lose money after finding a company to acquire, especially in the year following a merger.)

Jim Cramer, the host of “Mad Money” on CNBC, is similarly dubious, saying on a recent program he thinks SPACs have “jumped the shark.” His reasoning? The involvement of so many celebrities with minimal investing experience.

“These newer SPACs increasingly feel like an inside joke for the superrich and a way for celebrities to monetize their reputations,” Mr. Cramer told his viewers, adding that the whole celebrity SPAC thing seems “gimmicky.”

For his part, Mr. Ritholtz, ever the student of human nature as it relates to money, cited one of his favorite adages, Sturgeon’s law. Coined by Theodore Sturgeon, a science-fiction writer, it holds that “90 percent of everything is crap.”

A handful of SPACs performed really well over the last two years, Mr. Ritholtz said. That doesn’t mean the Shaq SPAC will, too.

“What always happens with investors, no matter the asset class or the decade, somebody hits the lottery and everyone else piles in,” he said. “The SPAC enthusiasm is just investor behavior. People look at these as lottery tickets, and very often they’re not.”

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