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Spac’s boom will give investors “a pretty expensive lesson,” as the race to make itself public through blank check vehicles creates “castles in the sky,” warned one of the top short sellers.
Jim Chanos, who is still best known for predicting the collapse of energy group Enron, accused some who have taken public companies through a Spac of “playing fast with their projections” in an effort to attract investors retailers.
Kynikos Associates, the hedge fund founded by the 63-year-old, is betting on several Spac companies that are “very bad companies” and whose valuations “have become silly,” Chanos said. He refused to call them.
Criticism comes as scandals from several high-profile Spac companies begin to dampen the euphoria generated by a boom that began last year and gained momentum earlier this year.
US electric truck manufacturer Lordstown Motors this month he warned that his business could run out of money despite previously stating that he had enough money to build his flagship vehicle. Rival Nikola, which went public in June 2020, has also studied several of the claims has created more of its technology.
“Now you see all sorts of situations that probably wouldn’t happen in the IPO process that are made public through the Spac machinery,” Chanos said.
“As the boom progresses, we suspect that more and more companies are playing. . . fast and loose with its projections to attract investors to commit capital “.
The spaces, or acquisition vehicles for special uses, raise money from investors through a listing with the promise of merging with a real business. For the past 18 months, top-tier mutual funds, private equity firms and retail investors have spent money on it.
According to data provider Refinitiv, they have raised $ 100 billion worldwide from 370 listings this year and there are now more than 400 Spacs looking for companies to buy from.
Companies that go public through a Spac instead of a traditional IPO have a bigger license to make bold sales forecasts, something they’ve already had drew attention of the Securities and Exchange Commission.
Chanos said that the the regulator should intervene because “that is [the projections] where investors have stars in their eyes and are likely to lose a lot of money. ”
Bonanza has launched several prolific sponsors, the name given to the founders of Spac, including the former Facebook executive Chamath Palihapitiya, a former Citigroup distributor Michael Klein and Cantor Fitzgerald CEO Howard Lutnick.
Chanos warned of the danger that investors would be fooled by reputation, while also warning against the “smart boy syndrome” or “celebrity patina” where high-profile names are worn to endorse a deal.
Sports betting company DraftKings, for example, added celebrities to its board, including basketball legend Michael Jordan and supermodel Gisele Bündchen.
“You have to be very, very careful when you follow things towards things,” Chanos said.
However, the veteran short salesman, who has run New York-based Kynikos for more than three decades, is not entirely hostile to the Spac market. Kynikos has taken long positions in blank check vehicles that are listed below the $ 10 listed before they go to buy a business.
The space boom has emerged alongside an impressive rebound in U.S. equities over the past year. The S&P 500 benchmark has risen 95% from its low in March 2020, when the pandemic markets appeared.
It has proven to be a testing backdrop for short sellers. Although Kynikos did nearly $ 100 million betting against German payment group Wirecard, its assets have fallen below $ 1 billion after surpassing $ 7 billion after the financial crisis.
There are bubbles beyond Spacs, Chanos said, pointing to the example of Torchlight Energy, an American company that began life by offering fitness classes based on pole dancing, but has since become in a shale producer. He raises money after his shares skyrocketed more than ten this year.
“Life is hard on the short side,” Chanos said. “If it were a stripper pole company, but it announced a merger, I think it could raise a lot more money than short sellers have now.”
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