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The market for special purpose companies has become an unexpected victim of the Archegos Capital Management scandal, as banks provide loans to cover funds that made large investments in white check companies.
Wall Street banks have been careful after how much leverage they can give customers fall Several market participants have reported that the investment firm led by Archegos Bill Hwang is forcing hedge funds and family offices to reconsider Spacs ’investments.
“As a result of Archegos, the first conditions of the broker have generally been hardened,” said a senior banker who works on Spac agreements. “The hedge fund’s profitability profile comes from a lever that is used a lot. When the lever was put on it was a sauce train.”
The lack of leverage weakens hedge fund investment strategies that have played a major role in fueling the Spac boom, usually by investing early – and then not sticking around for long.
These investors receive shares of shares in Spacs each before being placed on a $ 10 list, and the money raised by the company is placed in trust that the U.S. Treasury buys.
By using borrowed money, the funds get a more substantial return on the underlying asset, which many believe is risk-free.
Many hedge funds are “volatile” in their share price or recover their investment when it is time for shareholders to vote on the latest merger with an operating company.
These investments have been very profitable when retailers are promoting Spacs shares based on sponsors. star status. However, as levers are increasingly reduced and interest in pure check companies is declining, it will be difficult to replicate the profitability that hedge funds have achieved until recently.
Leverage reductions are another headwind in the Spac market after a great success in 2020 and until 2021. the performance has been sour in recent months amid a backlog of technology stocks and regulatory and accounting concerns.
“We’re seeing stock prices trading below par because stocks don’t offer leverage with complete freedom and it’s more expensive today,” said Matthew Simpson, managing partner of Wealthspring Capital, which makes investments in Spacs.
According to an analysis by Refinitv’s Financial Times data, more than 80 percent of Spac, which is still looking for acquisition targets, is trading below $ 10, the share price of companies worth a price in the initial public offering.
“All the rocket fuel has come out of these things. If the use of hedge funds were allowed, hedge funds would be raised to buy all Spacs trading for less than $ 10, ”said Matthew Tuttle, CEO of Tuttle Capital Management, which manages the exchange-traded fund dedicated to Spacs.
It’s hard to pinpoint how many levers were expanded for Spacs ’hedge funds in the past or the exact data on the recent delay, but industry participants said they saw companies use the lever nine times before the Archegos exploded. up.
“The first brokers removed the post-Archegos crazy lever,” said a Spac investor.
A hedge fund manager who spoke to several major brokers about using the leverage for Spac investments said he had repeatedly told them they had reached their limits.
However, some market experts have said that the fall in Archegos has been a factor in Spacs ’cooling market, and overall the appetite for vacant companies is lower. The number of launches has slowed, with only 13 Spacs listed in the U.S. last month, up from 110 in March, according to Refinitiv data.
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