SPAC Association in The Wall Street Journal: SPAC Sponsors Were Winners Even on Losers

Money managers who oversaw blank-check companies kept making profits even in the face of significant losses to stock investors

Published by Eliot Brown

Oct. 15, 2022

Since AEye Inc. LIDR 7.33%increase; green up pointing triangle went public by merging with a special-purpose acquisition company in August 2021, shareholders have had a rough go. The laser-technology company’s stock is down over 90% in the midst of missed revenue projections and the broader rout in growth stocks.

The company that ran the SPAC has fared far better. The financial-services firm Cantor Fitzgerald LP invested less than $10 million in the deal, but has since reaped at least $35 million in fees related to the listing, share sales and the value of remaining holdings, securities filings show.

A Cantor spokeswoman didn’t respond to requests for comment. An AEye spokeswoman declined to comment.

As the air has come out of the SPAC boom of recent years, a clear winner has emerged: the money managers who oversaw the blank-check companies and who kept making profits even in the face of significant losses to stock investors.

Stock-market investors in SPACs that merged with private companies since 2015 lost an average 37% of their investment a year after the merger through the end of September, according to the authors of a forthcoming paper on SPACs in the Review of Financial Studies, an academic journal.

At the same time, SPAC managers, known as sponsors, turned an average investment of about $8 million into about $54 million, giving them average annualized returns of 110% on their initial investment in the SPACs, the authors found.

“There is no question that the sponsors had great returns at the same time that public market investors had very negative returns,” said Jay Ritter, a finance professor at the University of Florida who wrote the paper along with Minmo Gahng at the University of Florida and Donghang Zhang at the University of South Carolina. Share prices of more than one-third of the 339 SPACs that have merged with private companies since 2020 are down more than 80%, according to the data-tracking firm SPAC Research.

The authors’ data doesn’t include subsequent investments that sponsors often make in the companies when they merge. That means that for some poorly performing stocks, the sponsors have worse overall returns than for the figures examined in the study.

The mismatch of fortunes is largely due to the way SPAC sponsors are compensated.

SPACs are essentially publicly listed pools of cash in search of private companies to merge with—providing an alternative to an IPO. The sponsors who form the SPAC—private-equity managers, hedge funds and the occasional celebrity—commit an average of 5% of this initial funding and then raise the rest from stock investors, according to the researchers.

When the SPAC sponsor completes a merger, the sponsor gets a bonus typically equivalent to 20% of the value of the SPAC.

Many investors and academics have criticized this bonus—known as a promote—as overly generous given that it can lead sponsors to profit even if the SPAC’s investors are down over 90% in many cases. Regulators from the U.S. Securities and Exchange Commission have called SPAC sponsor compensation costly and drafted rules to make it more transparent to investors.

Backers of the promote structure say it allows sponsors to be compensated to take the risk to launch a SPAC, given that sponsors get little if they don’t complete a merger. The rate, they say, is set by the market, and it has fallen some as competition has grown.

The promote “is fully and fairly disclosed and has been for decades,” directors of the SPAC Association trade group wrote in a comment to the SEC in June. “If investors want to support a sponsor and pay them 50%, it’s their right.”

Read the full article in The Wall Street Journal here