The market for special purpose acquisition companies has been an unexpected casualty in the Archegos Capital Management scandal, as banks have been reluctant to lend to keep track of the funds invested so many of the companies are blank. inspection
Banks across Wall Street are especially wary of how much they can make available to their clients following breakdown by Archegos, the firm run by Bill Hwang, which is forcing hedge funds and family offices to also consider their investment in Spacs, according to several market participants.
“Prime broker terms are generally tightening as a result of Archegos,” said a senior banker working on the Spac deal. “There are a lot of return profiles for hedge funds that come from the leverage they use. It’s a gravy train when it’s used.”
Lack of leverage undermines investment strategies in hedge funds that play a major role in boosting the Spac boom, often by investing at an early stage – and then not for long.
Investors receive allocations of shares of Spacs before they are listed at $ 10 each, and the money raised by the company is placed in a trust that buys the U.S. Treasury.
By using borrowed money, funds end up getting a juicier yield from underlying assets that are considered by many to be risk -free.
Many hedge funds are then sold when there is a “pop” in the share price or their investment is withdrawn when the time comes for shareholders to vote on a final merger with an operating company.
Such an investment has proven to be more profitable if the traders in the fall take part in Spacs based on the promoters. star state. However, with leverage becoming increasingly constrained and interest in companies blank to enter, the returns enjoyed by hedge funds to date are difficult to follow.
Leverage restrictions are another factor in the Spac market after a blockbuster year in 2020 and a start in 2021. The market the show was over in recent months amid a recovery in technology stocks as well as regulatory and accounting problems.
“We see it in price action where securities are sold at below par because banks don’t provide leverage as freely as they did and it’s now more expensive,” said Matthew Simpson, managing partner at Wealthspring Capital, which invested in Spacs.
According to an analysis of Refinitv’s Financial Times data, more than 80 percent of Spacs still looking for targets are now selling below $ 10, the level at which shares of companies are blank. review of the initial public offer.
“All rocket fuel comes from these things. If hedge funds are allowed to be available, hedge funds can be used to buy all Spac trading for under $ 10,” said Matthew Tuttle , CEO of Tuttle Capital Management, which manages an exchange-traded fund dedicated to Spacs.
It’s hard to put an exact number on how much leverage hedge funds have provided for Spacs in the past, or the size of the recent recovery, but industry participants say they have seen firms used up to nine times leverage before Archegos blew up
“Leading brokers are taking crazy leverage post-Archegos,” said one Spac investor.
A hedge fund manager, who has spoken to several major brokers about using leverage for their investments in Spac, said they have always been told they have reached their limits.
However, some market experts say the fall in Archegos is a cause of a cooling market for Spacs, along with the generally lower appetite of companies that blank the review. The number of launches slowed to a breakthrough, with only 13 Spacs listed in the U.S. last month compared to 110 in March, according to Refinitiv data.