Jim Chanos warns that the Spac boom creates ‘castles in the sky’

One major short seller warned that a plumber’s boom will provide investors with a “very expensive lesson” as the race to go public with blank check cars creates “castles in the sky”.

Jim Chanos, who is still notorious for predicting the collapse of energy group Enron, has accused some of those who have publicly pitched companies via Spac of “playing quickly with their expectations” in an effort to entice retail investors.

Chanos said Kynikos Associates, the 63-year-old’s hedge fund, is betting against a number of Spac firms deemed “too bad business” and whose “valuations are turning ridiculous.” He declined to name it.

The criticism comes as scandals at several high-profile Spac companies have begun to quell the euphoria from the boom that began last year and gain momentum early this year.

American electric truck maker Lordstown Motors This month she warned that she might be running out of money despite previously saying she had enough cash to build her flagship car. Rival Nicola, which went public in June 2020, has also come under further scrutiny many claims She made her technology.

“You’re seeing all kinds of situations now that probably won’t make it through the IPO being put to the public via Spac machines,” Chanos said.

“As the boom continues, we suspect that more and more companies are playing . . . fast and pompous in their expectations in order to lure investors into committing capital.”

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

It raised $100 billion globally from 370 listings this year, according to data provider Refinitiv, and more than 400 Spacs are now looking for companies to buy it.

Companies going public via Spac rather than a traditional IPO have more license to make bold sales forecasts – which they have already done To be noticed Securities and Exchange Commission.

Chanos said that The regulator must intervene because this [the projections] Where investors get stars in their eyes and are liable to lose a lot of money.”

The bounty has spawned several prolific sponsors, which is the name given to the founders of Spac, including the former Facebook CEO. Palihapitiya moles, former dealmaker at Citigroup Michael Cline and Canor Fitzgerald CEO Howard Lutnick.

Chanos warned of the danger of their reputations being deceived by investors, while also warning of “smart man syndrome” or “celebrity looks” where high-profile names are brought in to endorse a deal.

For example, sports betting company Draft King has added celebrities to its board of directors, including basketball legend Michael Jordan and supermodel Gisele Bundchen.

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

However, the veteran short seller, who has run Kynikos in New York for more than three decades, isn’t entirely hostile to the Spac market. Kynikos have taken long positions in blank check vehicles trading for less than the $10 they scored before going to buy a business.

The Spac boom has gone hand in hand with a stunning rebound in US stocks over the past year. The benchmark S&P 500 index is up 95 percent from its lowest level in March 2020, when the pandemic hit the markets.

It has proven to be a back-testing for short sellers. Although Kynikos . made Nearly $100 million Betting on German payments group Wirecard, its assets have fallen below $1 billion after peaking at around $7 billion in the wake of the financial crisis.

There are bubbles outside Spacs, Chanos said, citing the example of Torchlight Energy, an American company that started out offering fitness classes around pole dancing but has since turned into a shale producer. It is raising funds after its shares have risen more than tenfold this year.

“Life is hard on the short side,” Chanos said. “If I was a curvy company, but I announced a merger, I think I could raise a lot more money than short sellers at the moment.”

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