SPACs: A Shiny Object Syndrome
“As protection against financial illusion or insanity,” wrote the polymath John Kenneth Galbraith, “memory is far better than law.” Yet, history has repeatedly shown that memory is often fleeting, particularly in finance. In his analysis of The Great Crash 1929, Galbraith noted: “As those days of disenchantment drew to a close, tens of thousands of Americans shook their heads and muttered, ‘Never again.’” Despite this pledge, financial markets continue to fall into familiar cycles of exuberance, speculation, and innovation. The proptech sector, which had emerged as a natural fit for the SPAC model, offers a case study in how the allure of quick liquidity and rapid growth led to a frenzy that, in many cases, failed to live up to expectations.
SPACs are a classic example of financial history repeating itself. Despite numerous cautionary tales and billions lost in failed ventures, investors have been drawn into this speculative arena time and again. SPACs, or "blank-cheque" companies as they were once known, have surged in popularity over the decades, but their most recent boom during the pandemic stands out as one of the most dramatic rises and falls in modern financial history.
The premise of SPACs is deceptively simple: sponsors raise money through an initial public offering (IPO) with the promise of finding a private company to merge with, effectively taking it public without the lengthy process of a traditional IPO. For investors, this process is a leap of faith, as they’re essentially funding an empty shell with no guaranteed target. Meanwhile, sponsors often secure around a 20% ownership stake for a minimal investment, ensuring they profit regardless of the outcome. Despite these inherent risks, SPACs became the investment trend of the pandemic era, with billions pouring in from retail and institutional investors.
However, as with many financial fads, reality soon failed to live up to the hype. According to SPAC Research, more than 350 SPACs have been liquidated since the start of 2022 without finding a merger partner, leaving retail investors to absorb the losses. Even sponsors face risks; if they fail to identify a merger partner within two years, they must return the money raised, including underwriting fees, to investors. For instance, Bill Ackman, a prominent hedge fund manager, launched the largest SPAC ever, Pershing Square Tontine Holdings, raising $4bn in 2021. Yet, by 2022, Ackman had to return the funds to investors after failing to secure a deal.
The fallout from SPAC mania has been significant. High-profile mergers involving companies like WeWork, Lordstown Motors, and AppHarvest ended in bankruptcy, leading to massive investor losses. Bloomberg reported that SPAC-related bankruptcies wiped out $46bn in peak market capitalizations in 2023 alone.
SPACs have been utilised in real estate with mixed results. According to Practical Law, SPACs are particularly attractive to certain high-growth or tech-focused asset classes. Proptech companies, which develop technological solutions for the real estate industry, align well with SPACs' emphasis on innovation and growth. Sectors like data centres, cell towers, gaming, leisure, industrial infrastructure, and healthcare have proven to be fertile ground for SPAC transactions, given their high growth potential. Real estate businesses with innovative models, such as residential lending platforms and companies involved in short-term, flexible apartment and office space leasing, have engaged in SPAC transactions. These sectors exhibit adaptability and growth potential, making them well-suited for SPACs seeking to capture value in emerging real estate trends
However, SPACs are often unsuitable for traditional real estate investments. Real estate deals typically require more time to evaluate, negotiate, and complete than the two-year window that SPACs operate within. Additionally, real estate assets offer steady returns rather than the explosive growth that SPAC investors seek. The complexity of SPAC structures, including sponsor compensation through warrants, can also diminish returns, making them less competitive compared to traditional real estate investment methods.
SPACs themselves had a questionable start, initially appearing as "blank-check corporations" in the 1980s with minimal regulation, which led to rampant fraud and billions in losses. It wasn't until Congress intervened that they gained legitimacy. Over time, SPACs became a niche industry supported by boutique legal firms, auditors, and investment banks. This changed dramatically in 2020 when serious investors began launching SPACs in significant numbers. By the first quarter of 2021, SPACs accounted for more than 50% of all newly listed U.S. public companies, fuelled by their ability to offer a faster, potentially less risky path to public markets compared to traditional IPOs.
Yet, investor euphoria soon turned to scepticism. A study by researchers Michael Klausner, Michael Ohlrogge, and Emily Ruan found that, despite SPAC creators thriving, many investors suffered significant losses. High-profile endorsements by celebrities and public figures only added to the perception of SPACs as more about status than sound investment opportunities. INSEAD professor Ivana Naumovska highlighted this shift, suggesting in her article “The SPAC Bubble Is About to Burst” that SPACs had not truly evolved from their dubious origins.
While the SPAC craze has somewhat faded, it hasn’t disappeared entirely. There were still 31 SPAC IPOs in 2023, albeit a significant decline from the 613 recorded in 2021. Despite setbacks in previous years, SPACs have made a comeback, with funding in 2024 up 20% from the previous year, totalling $3bn in new equity capital raised so far. This resurgence is partly driven by a slowdown in the traditional IPO market. With venture capital and private equity firms eager to exit their investments, SPACs present an appealing alternative. Even in real estate, examples like Starwood Capital Group's plan to take ownership of luxury hotels public via a SPAC demonstrate that this financial structure still holds appeal.
Accor, the Paris-based hotel company known for brands like Novotel and Raffles, recently attempted to enter the SPAC market with plans to raise up to $366m through its SPAC listing named Accor Acquisition Co. (AAC). This move is seen as a strategic effort to keep potential real estate assets off Accor’s balance sheet, as it has focused on an asset-light strategy over recent years by selling off its real estate holdings to concentrate on management and licensing agreements. Analysts suggest that Accor could use the SPAC to acquire hotel properties, then hand over the management and branding agreements to Accor, effectively growing its lifestyle hotel portfolio without directly owning the underlying real estate. This approach mirrors how SPACs can facilitate growth in sectors that don't neatly fit into a company's existing business model, allowing Accor to manage its expansion while maintaining its asset-light strategy.
In the proptech sector, SPACs experienced significant momentum, with private investment reaching $32 billion in 2021. However, the fundraising environment changed drastically in 2022, as proptech companies faced declining share prices and layoffs after going public via SPACs. Notable examples such as WeWork, Latch, and Opendoor suffered massive valuation drops, highlighting the risks of this route. Amid this challenging environment, some firms abandoned their SPAC plans. New York developer RXR Realty, for example, decided to dissolve its SPAC, RXR Acquisition Corp., returning $345m to investors after finding the valuations of potential startup acquisitions too high. Similarly, Cain International scrapped its own SPAC plans to raise $250m for taking an entertainment or real estate company public.
Despite this trend of withdrawal, there are still signs of optimism. Venture capital firm Fifth Wall recently announced raising $866m for proptech investment, a record for the sector. They also revealed a deal to take a company that owns and operates parking garages public via one of their SPACs, indicating that while the SPAC market for proptech has cooled, there are still targeted opportunities for growth.
Overall, the performance of real estate-related SPACs has been disappointing, with many failing to deliver anticipated returns. Of the 27 real estate SPACs covered by CoStar, only seven completed a merger, and their shares fell an average of 39% from their initial offering price. This compares unfavourably with broader SPAC performance, where a key ETF tracking the 25 largest SPAC companies saw a 63.75% negative return.
In contrast, there have been a few exceptions, such as CBRE's SPAC merger with Altus Power, which resulted in the company's stock trading 19% above its IPO price. However, CBRE's leadership has acknowledged that current market conditions are not conducive to pursuing another SPAC, reflecting a broader sense of caution in the industry.
Real estate deals often move at glacial speeds, certainly compared to other financial instruments. It is precisely this feature that should sound warning bells when real estate companies attempt to capitalise on new (indeed old) financial artifices. Cooler heads seem to have prevailed and some real estate SPACs have proven to be successful and remunerative for end investors, particularly those supporting the core business model and ancillary business lines. Still, the industry was guilty of the Shiny Object Syndrome – captivated by quick liquidity at the expense of established real estate principles that ensure long-term stability. As John Kenneth Galbraith aptly noted in The Affluent Society, “The enemy of the conventional wisdom is not ideas but the march of events.” This insight serves as a reminder that only those who adapt thoughtfully, rather than impulsively, will endure the ever-changing real estate landscape.