Not many things unite 7ft tall basketball player Shaquille O’Neal, rapper Jay-Z and former top Trump official Gary Cohn. But in their own worlds, all of those names attract a certain amount of stardust.
Now, the trio are among a gaggle of A-listers seeking to cash in on that magic through the latest Wall Street craze: the special purpose acquisition company.
Spacs are blank cheque companies. They go public, aiming to raise a few hundred million dollars on stock markets, with the intention of buying a fast-growing tech company within two years. These shell companies have no revenue, but promise a quick route to market for a technology founder and investors are typically not told what the target is before forking out their money.
Forest Road Acquisition Corp’s Spac, backed by O’Neal, last month bought fitness company Beachbody in a $2.8bn (£2bn) deal.
Other celebrities who have invested in Spacs include tennis star Serena Williams, anti-racism activist and NFL quarterback Colin Kaepernick and Billy Beane, whose career at baseball team the Oakland A’s was immortalised in the film Moneyball. All these famous names have helped kick off an investment frenzy. Spacs have so far sucked in $72bn of cash in listings this year, according to data from monitoring service SPACInsider – almost as much as the total for the whole of 2020 – while regular floats have raised around $25bn. However, the influx of celebrities and politicians is making some investors nervous.
Total raised by SPACs
Charlie Munger, a long-time business partner of Warren Buffett, said of celebrity Spac deals last month: “The investment banking profession will sell s— as long as s— can be sold.”
Some are beginning to compare the phenomenon to the bubble in ICOs, or initial coin offerings – a 2018 trend in which celebrities lent their names to all manner of cryptocurrency schemes that raised hundreds of millions of dollars and then in many cases lost it all. “During the ICO craze, a project needed only a team, a website and a white paper,” wrote Mati Greenspan, of Quantum Economics. “With this new Spac phenomenon, all you really need is a celebrity and a dream.”
Spacs backed by celebrities have already landed several merger deals in which they will take private companies onto US stock markets. Forest Road lists O’Neal as “a strategic adviser [with] a keen eye for investing in successful ventures, having invested in Google prior to its initial public offering”. Other advisers include Kevin Mayer, the former head of Disney+ and former chief of TikTok. The company will take two firms public in a three-way merger, home-fitness company Beachbody and fitness bike company Myx. It will list with the ticker “Body”.
Meanwhile, the Spac Subversive Capital acquired US cannabis company Caliva, backed by Jay-Z. He will stay on as “chief visionary officer”.
Rapper Jay-Z is backing a the special purpose acquisition company called Subversive Capital
Credit: AP
A-listers and sports royalty are not the only ones getting in on the action. Washington elites are also eyeing deals. Former Republican House speaker Paul Ryan has an acquisition company, as does Cohn, a former top executive at Goldman Sachs and one-time adviser to Donald Trump. A raft of ex-chief executives at major firms are setting up in the market too.
Spacs have proved popular on Wall Street amid soaring demand for assets as funds seek to deploy their spare cash. The companies have a two-year timeline in which to find a merger target. If they fail, or the sponsors reject the merger, they can get their money back. Some investors believe that while Spacs may represent a good deal for their early backers, they often have not performed well for shareholders buying in later.
“It is not clear what the Spac offers to investors,” says Ivan Sedgwick, investment director at LGB & Co. “Part of the Spac, typically 20pc, has been gifted on inception to the promoter [the management team and advisers]. That’s a terrific deal for the promoters. It may be that the new managers are so good they can get a superior return. But it’s not clear there’s much evidence for that.”
‘The music will stop’
Spacs are effectively impossible to engineer in Britain, due to rules that force companies to suspend their shares in the event of a reverse takeover. That means they are unattractive to pull off on the London Stock Exchange.
However, a review by Lord Hill called for a “liberalising [of] the rules regarding Spacs, with appropriate safeguards in place”.
Clive Black, of Shore Capital, who wrote to the Treasury in support of SPACs, said: “In reality, the SPAC boat has left the port in New York and Amsterdam, so the UK needs to be thinking effectively but also with pace on the matter.”
A tweak to listing rules could allow the City to benefit from fees and floats following a boom on the Nasdaq and New York Stock Exchange. It could also mean more technology goes public in the City rather than heading overseas. Perhaps the most pressing question is how long the boom will last.
Researchers from Stanford and New York University warned that as with other markets hyped by celebrities, many investors late to the party will end up getting burnt.
In reply to a commenter, author Michael Klausner of Stanford said: “We are in a game of musical chairs and the music continues to play. Until it stops, one can make money. But it will stop at some point.”
Investors will be hoping the stardust from all those big names does not fade away too soon.
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