GS ACQUISITION HOLDINGS II A

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Volatility Hits the Sizzling SPAC Market

03/09/2021 | 05:27pm EDT

By Amrith Ramkumar

Shares of technology firms and special-purpose acquisition companies surged on Tuesday, bouncing back after a weekslong streak of declines that pushed some popular SPACs down 20% or more in a month.

The Nasdaq Composite surged 3.7% for its biggest advance since November, trimming a recent slide that just one day earlier had dragged it more than 10% below its February all-time high. Shares of electric-car company Tesla Inc. rebounded 20%, adding more than $100 billion to the company's market value, or roughly the equivalent of two Ford Motor Co.

Some popular companies that have gone public by merging with so-called SPACs in recent years -- including online real-estate firm Opendoor Technologies Inc., space-tourism company Virgin Galactic Holdings Inc. and electric-car company Lordstown Motors Corp. -- added 6% or more. Those all remain down at least 30% in the last month.

Tuesday's swings highlighted the competing dynamics playing out in financial markets as the economy rebounds from shutdowns designed to halt the spread of the coronavirus. Investors for weeks had sold SPACs and popular internet companies, rotating into shares of banks and energy producers that they believed would fare better as the economy recovers and government-bond yields rise.

Also called blank-check companies, SPACs are shell firms that list on a stock exchange with the sole purpose of acquiring a private company to take it public. The private firm, often a startup, then gets the SPAC's place in the stock market. Merging with a SPAC has become a popular way for companies to go public because the process carries looser regulatory requirements and brings outsize returns for Wall Street and Silicon Valley investors.

Investors have poured money into SPACs at a record pace this year -- roughly five new ones are being created daily and they have raised almost $75 billion, according to Dealogic -- a sign of exuberance because traders are often betting on SPAC executives to do an attractive deal. Even though SPACs and other hot investments rebounded Tuesday, the recent swings have many investors bracing for more gyrations in the days ahead.

"It's going to be more violent," said Evan Ratner, a SPAC portfolio manager at Easterly Alternatives. Unless government-bond yields record a sustained drop, "volatility is here to stay," he added.

With the yield on the benchmark 10-year U.S. Treasury note settling at 1.6% on Monday, up from 1% in late January, some analysts have questioned SPACs and other popular investments. Treasury yields, which climb as bond prices fall, slid on Tuesday, at least temporarily easing concerns about a fast rise in economic activity that forces the Federal Reserve to raise interest rates more quickly than currently anticipated.

Rising bond yields hurt SPACs and other technology stocks because they give investors a more appealing alternative to speculative wagers. SPACs have no business until they acquire a startup to take public, so outsize gains in blank-check firms were surprising to many analysts because money was pouring into the space even when it meant buying at prices that were higher than the amount of cash that SPACs had to do a deal.

Market volatility also has engulfed SPACs that have yet to unveil which companies they are taking public. Even with Tuesday's climb, hedge-fund billionaire William Ackman's Pershing Square Tontine Holdings Ltd. has fallen 11% in the past month, sliding alongside other popular SPACs such as venture capitalist Chamath Palihapitiya's Social Capital Hedosophia Holdings Corp. VI and GS Acquisition Holdings Corp. II.

The recent gyrations mark what some analysts call an inevitable return to earth. With SPAC creators clamoring to raise more money and capitalize on the excitement, some investors see the swings as a necessary reality check following a period of excessive optimism.

"You see people rushing to do it while the window is still open," said Roy Behren, managing member at Westchester Capital Management and a SPAC investor. And among investors, "everybody wants to own the next DraftKings or Virgin Galactic," he said, referring to two of the most popular companies to go public by combining with blank-check firms.

Tuesday's moves also showed how many on Wall Street have linked SPACs with technology stocks and cryptocurrencies, meaning that blank-check companies are prone to outsize moves when trend-following investors buy or sell all of those assets together.

The swings mean the enormous paper gains earned by active SPAC creators like Mr. Palihapitiya and former Citigroup Inc. deal maker Michael Klein have shrunk, and some investors who had piled into SPACs at high prices have taken a beating. Investors wagering on declines in stocks tied to the sector are cheering the shift.

But the turmoil is also opening up even more opportunities for bargain-seeking investors. With SPACs on track to soon eclipse last year's record total of more than $80 billion raised, individual traders have new chances to get in early with blank-check firms at prices typically only available to large institutions.

And some SPACs have even fallen below levels that correspond to the amount of cash they have on hand. Because investors can withdraw that cash before a SPAC deal goes through, buying at or below that price can result in risk-free returns.

With nearly 400 SPACs in the market seeking companies to take public, the volatility is likely just beginning.

"It's still an extremely interesting space," Mr. Behren said.

Write to Amrith Ramkumar at amrith.ramkumar@wsj.com

(END) Dow Jones Newswires

03-09-21 1727ET

Stocks mentioned in the article
ChangeLast1st jan.
CITIGROUP INC. -3.39% 49.32 Delayed Quote.-18.33%
DJ INDUSTRIAL -3.57% 31490.07 Real-time Quote.-10.14%
DRAFTKINGS INC. 0.00% 13.86 Delayed Quote.-49.55%
FORD MOTOR COMPANY -5.54% 12.78 Delayed Quote.-38.47%
LORDSTOWN MOTORS CORP. -1.67% 2.35 Delayed Quote.-31.88%
NASDAQ 100 -5.06% 11928.31 Real-time Quote.-26.91%
NASDAQ COMP. -4.73% 11418.15 Real-time Quote.-27.02%
OPENDOOR TECHNOLOGIES INC. -8.91% 6.85 Delayed Quote.-53.11%
PERSHING SQUARE HOLDINGS, LTD. -4.27% 30.3 Real-time Quote.-22.75%
PERSHING SQUARE TONTINE HOLDINGS, LTD. -0.05% 19.83 Delayed Quote.0.56%
S&P 500 -4.04% 3923.68 Real-time Quote.-14.21%
SOCIAL CAPITAL HEDOSOPHIA HOLDINGS CORP. VI -0.20% 10 Delayed Quote.-1.86%
TESLA, INC. -6.80% 709.81 Delayed Quote.-32.83%
VIRGIN GALACTIC HOLDINGS, INC. -4.78% 6.37 Delayed Quote.-52.39%
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