Archegos Capital Collapse Hits SPAC Market

The Archegos Capital Management scandal that hit some of the world’s biggest banks with losses topping $10 billion is also affecting the market for special purpose acquisition companies (SPACs), the Financial Times reported on Friday (May 28).

As a result of the fallout of the collapse of the investment firm run by Bill Hwang, banks have reeled in lending to hedge funds that have sunk a lot of money into SPACs, also known as blank check companies,  several market participants told FT. 

“Prime broker terms generally have tightened as a result of Archegos,” a senior banker who works on SPAC deals said, per FT. “A lot of the return profile for hedge funds is derived from the leverage they employ. It was a gravy train when it was levered.”

SPAC investments were money-making propositions when shares rose due to the name brand awareness of the blank check companies involved. But with interest in SPACs falling off, and further restrictions on leverage, hedge funds’ returns also are declining.

“We are seeing it in the price action where securities are trading below par because banks are not offering leverage as freely as they did and it’s now more expensive,” said Wealthspring Capital’s Matthew Simpson, per the news outlet.

More than 80 percent of SPACs that have yet to find acquisitions are trading below the $10 mark, which is the minimum pricing of blank check IPOs.

“All the rocket fuel has come out of these things. If hedge funds were allowed to lever up, hedge funds would be levering up to buy all the SPACs trading under $10,” said Matthew Tuttle, CEO of Tuttle Capital Management, who manages an exchange-traded fund that is dedicated to blank check companies.

Startup heads are also exercising caution concerning SPAC mergers due to falling share prices and missing earnings forecasts. Among 44 tech companies merging with SPACs to go public in 2020 and the first four months of 2021 saw share prices plunge an average of 12.6 percent as of May 17.

Despite the popularity of SPACs, traditional initial public offerings (IPOs) trade higher. As of April 15, SPACs were trading up 1.2 percent while traditional IPOs were up 36 percent.