Jim Chanos warns Spac boom creates “castles in the sky”

The Spac boom will give investors “a pretty expensive lesson” that the race to go public through vehicles to blank checks creates “castles in the sky,” warned a short-sighted seller.

Jim Chanos, who remains best known for predicting the collapse of energy group Enron, has accused some who have taken over public companies via a Spac of “playing fast and furious with their projections” in an effort to appeal to retail investors.

Kynikos Associates, the 63-year-old hedge fund, is making a bet against a number of Spac companies that are “very bad companies” and whose valuations “have become stupid,” Chanos said. He refused to name it.

The criticism comes as scandals at 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 driver Lordstown Motors this month he warned that his business may run out of money despite the previous statement that he had enough money to build his flagship vehicle. Rival Nikola, who went public in June 2020, also scrutinized many of the claims has done about its technology.

“You see all kinds of situations now that probably don’t happen in the IPO process that come publicly via the Spac machine,” Chanos said.

“When the boom is over, we suspect that more and more companies will play… Fast and loose with their projections to invite investors to commit capital.”

Spacs, or special purpose purchase vehicles, collect money from investors through a listing on the promise of merging with a real business. Over the past 18 months, blue-chip mutual funds, private equity firms and retail investors have invested money in them.

They have raised $ 100 billion globally from 370 ads this year, according to data provider Refinitiv, and more than 400 Spacs are now chasing companies to buy.

Companies that publish publicly via a Spac instead of a traditional IPO have a larger license to make bold sales forecasts – something they already have. attracted attention of the Securities and Exchange Commission.

Chanos said that the the regulator must intervene because “here [the projections] where investors take stars in their eyes and are prone to losing 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, former Citigroup dealer Michael Klein and Cantor Fitzgerald executive director Howard Lutnick.

Chanos warned of the danger that investors would be deceived by reputations, even warning against “smart guy syndrome” or the “celebrity patina” where high-level names are brought in to approve a deal.

Sports betting company DraftKings, for example, has added celebrities to its board, including basketball legend Michael Jordan and supermodel Gisele Bündchen.

“You have to be very, very careful when you follow people in things,” Chanos said.

However, the veteran short salesman, who has run Kynikos in New York for more than three decades, is not completely hostile to the Spac market. Kynikos has taken long positions in white check vehicles that are marketed under the $ 10 they list before going to buy a company.

The Spac boom developed alongside a nice rebound in U.S. stocks last year. The S&P 500 benchmark rose 95 percent from its low reached in March 2020, when the start of pandemics hit markets.

It showed a test fund for short sellers. Although Kynikos did almost $ 100m betting against German payment group Wirecard, its assets fell below $ 1 billion after culminating in about $ 7 billion after the financial crisis.

There are bubbles beyond Spacs, Chanos said, citing the example of Torchlight Energy, an American company that started life by offering fitness classes based around pole dancing but has since become a shale producer. . This raised money after his shares have increased more than tenfold this year.

“Life is rough on the short side,” Chanos said. “If I were a stripper business, but I announced a merger, I thought I could raise a lot more money from short-term sellers now.”