Despite the worst year the automotive industry and global economy have seen in decades, Tesla shares have still had a meteoric rise in recent months. The electric automaker’s stock price shot up six-fold in the last year to achieve a valuation just north of $300 billion. In doing so, Tesla has fostered an eruption in the share prices of electric vehicle-related companies, allowing them to raise much-needed capital, and oftentimes becoming publicly traded through SPACs, a mysterious financial instrument.
But what is a SPAC? (It's pronounced "spack," by the way.) Why did EV startup Fisker go that route earlier this month? And will they continue to generate astronomical returns in the electric car space this year and beyond?
Imagine a slick talker from Manhattan in a fancy suit who comes to you and says, “I have a good track record investing in the stock market, and I want you to give me $500 million to go out and look for and buy something that investors will love to own as a public company. If I’m right, you will make a bunch of money but if I’m wrong, I’ll give you your money back with interest.” He continues, “All I need is a maximum of 18 months but if you get bored or need your money back, you can sell your investment for a minuscule profit or loss, if any.”
Sounds good, right? At its very simplest form, a SPAC is just a publicly-traded shell company that has only a bank account with $100+ million sitting there earning interest, whose sole purpose to fund an acquisition of a privately held company. A SPAC is a bet on the jockey, not the horse. And they're about to play a huge part in the EV game.
The Tesla Effect
Elon Musk deserves a lot of credit for transforming a company that had shipped less than 150 units by the time he joined as CEO into a multi-billion dollar behemoth that is now the most valuable carmaker in the world. You can call Musk crazy, or a liar, but if a CEO is judged by the performance of his company’s share price, he’s executed.
That being said, it’s fair to wonder if Tesla’s blindspot detection actually works, and I don’t mean on the cars. Tesla essentially created the environment for its competition to raise as much capital is needed to level the playing field in the EV industry. Just this month, rival luxury EV truck startup Rivian was injected with $2.5 billion to complete the development of its first commercially available vehicle.
We have to think Rivian owes some gratitude to Musk for playing a part in enabling this massive venture financing round. Rivian’s CEO, RJ Scaringe, can honestly say “funding secured.” EV stocks are very firmly the next big thing.
Simultaneous with the spike of interest in publicly traded EV companies, we are witnessing a resurgence in the market for SPACs: “Special Purpose Acquisition Companies.” SPACs have been around since the mid-1990s, during which time they have come in and out of fashion as an expedited and less expensive way for a company to go public over a traditional initial public offering.
And we are now in a market that is foaming at the mouth for everything SPAC. This most recent surge was sparked by the enormous SPAC successes of Draftkings and Virgin Galactic, whose shares each soared more than 400 percent from their IPO prices.
Wall Street sees fads come and go, gaining momentum and skyrocketing to a top, and then crashing and burning before anyone knows what happened. We all remember the causes of the Great Recession or the cryptocurrency craze of 2018-2019. The unique aspect of what is going on today is that we have two completely distinct fads—one based on a sector, and the other on a deal structure—taking off and converging with one another into a “super fad.”
But we should all be asking whether the combination of these two surging markets is sustainable, or will it eventually fall apart.
(In the interest of full disclosure, we, the authors of this piece at the time of publication, are investors in EVSI, and we may at some point purchase securities in the companies named here. This story is meant to explain how SPACs work, not as investment advice.)
The SPAC Boom
In order to cash in while this phenomenon is hot, bankers are scrambling to jam electric carmaker startups into SPACs at lighting speed. More interestingly, however, are the share price explosions we are witnessing when these deals are announced and eventually completed:
You may be scratching your head thinking the above percentage returns can’t be right. We’re only halfway through the year, and all these companies have at some point more than doubled—or even increased eightfold.
On March 3, VectoIQ, a SPAC, and Nikola Motors, a privately held electric semi-truck company, announced their intention to merge in a deal valued at $3.3 billion. That seems like a very high number, especially for a company that has yet to break ground on a manufacturing facility. But in the weeks that followed, the stock went from $10 to $15, and then from $15 to $30, and in June, the stock price skyrocketed to around $60 and then peaked at $95 on June 9.
While part of the meteoric rise in the share price can be attributed to one or more “short squeezes” and an influx of new traders opening accounts on Robinhood and rushing into the most volatile trades they can find, it’s impossible to ignore that for a brief moment in time, Nikola was valued at over $30 billion—more than Ford or Fiat Chrysler.
Is it overvalued? Most fundamental investors would argue yes, considering it has yet to build or sell a single truck. But at this moment, the investors, traders and the speculation gods are making an enormous bet that Nikola will execute on its business plan and build this truck of the future, a task that will be a lot easier to accomplish with $700 million of cash sitting in the bank.
On July 13, 2020, Spartan Energy Acquisition Corp, a SPAC headed by Apollo Global Management, announced a merger with Fisker Inc., a privately held electric car manufacturer, in a transaction valued at almost $3 billion.
Are you starting to notice a pattern? What’s interesting about this announcement is that Fisker has been around the block before, having gone through numerous failed attempts and even bankruptcy (and confusingly, the “original” Fisker now lives on as Karma Automotive; the “new” Fisker will sell cars based on Volkswagen’s new electric platform).
From the sidelines, it’s hard not to wonder whether Apollo, one of the largest and most successful investment companies of all time, actually believes in the company and its potential, or if it’s just trying to cash in on the EV and SPAC frenzies while the iron is still hot. That being said, the completion of this transaction will provide Fisker with $1 billion to bring to market what it claims is the most sustainable and green EV on the market. The “Ocean” is made of recycled materials and comes standard with vegan interiors.
Can it be the next great Tesla-fighter? Who knows, but Apollo thinks it’s worth a shot to try.
So what is a SPAC?
Here’s some background on the current SPAC craze. In the 1970s, the concept of a Blind Pool emerged as a way to back the above mentioned Wall Street wheelers and dealers, allowing them to invest a pile of money on the investors’ behalf without any conventional limitations or oversight.
As is common with Wall Street, greed got the better of these financiers when they decided to enrich themselves at the expense of their investors. When regulators caught wind of what was happening, Blind Pools were shut down, leaving bankers with access to capital without anywhere to put it.
Fast forward to the mid-1990s when a small investment bank named GKN Securities enhanced the Blind Pool concept by layering on investor protections (i.e. checks and balances), and registering the trademark for their new product, the “special purpose acquisition company.”
Like many things in the stock market, SPACs have fallen in and out of favor over the last 20+ years, each time resurfacing in a bigger and bolder way. After a period of sustained success in the late 1990s, the dotcom crash nearly put a halt on all SPAC activity. Once the market had a chance to catch its breath, SPACs resurfaced, completing offerings on larger exchanges like the NYSE and NASDAQ.
Not surprisingly, the global financial crisis of 2008 decimated the SPAC market. It has since rebounded steadily and is now exploding in a never before seen way. As a friend of mine put it, “the appetite is back and it’s not in the ‘nibble on this cookie’ kind of way. It's the ‘give me the whole damn box of cookies now, don’t forget the crumbs and throw in a few scoops of ice cream’ kind of way.”
So let’s recap: a concept that started at a relatively unknown boutique bank in the mid-1990s is now captivating all of Wall Street, from the big boys at Credit Suisse, Goldman Sachs and Citigroup down to the high school senior that opened up a Robinhood account with his bar mitzvah money while sitting through his Zoom graduation.
One of the beauties of SPACs is that they give investors the ability to get a free look at an acquisition, a feature that is not typically available in the financial world. If the market consensus likes the deal, the stock price will go up and the deal will go through, all the while the investors can decide whether to hold on to their investment or sell at a profit.
If the market consensus does not like the deal, and the stock price goes down, the deal will be terminated and the investors all get their money back plus interest. Sometimes, when the sponsor has a particularly successful track record, or the stated target industry of the SPAC is in a hot space (like EVs right now), the price of the SPAC trades higher even before the deal is announced, giving the investor to get out at a profit even sooner.
At first glance, SPACs are a win-win for everyone: Private companies are getting massive cash injections that were otherwise unavailable, the banks and stock exchanges are getting fat and happy charging all their fees and investors are seemingly thrilled with the outsized returns. However, it’s important to remember that there are two sides to every trade: for every person that sold a share at the top, there's someone on the other side of the transaction that bought it.
The most important questions we should all be asking are these: do SPACs have real staying power and if they don’t, how does it all end this time?
And Why Should I Care?
So which EV startup will be next to announce their engagement with Wall Street’s chosen 2020 vehicle to go public and secure capital beyond its wildest dreams?
Rivian is a Michigan-based EV company with some of the most notable investors in the space. In 2019 alone, it raised $2.85 billion from the likes of Amazon, Ford, Cox and T. Rowe Price. Since the company has plenty of cash and already has A-list investors, there doesn’t seem to be much of a reason for it to go public in the short term, let alone through a SPAC.
Faraday Future is a California based EV company that was launched with the backing of Chinese billionaire Jia Yueting. The company has an especially fraught past, with a long list of missteps including botched attempts at opening manufacturing plants, a multi-year going concern of the company’s solvency, resignations of multiple senior executives, massive layoffs and numerous delays of its product launches.
The company’s troubled history will be a very difficult hurdle for regulators to ignore in letting Faraday go public, and is, therefore, an unlikely contender for the next EV SPAC.
Lucid Motors was founded in 2007 under the name Atieva and was originally focused on developing batteries and powertrains for other EV manufacturers. In 2017, the company rebranded to Lucid and announced that it would develop its own line of ultra-luxury electric vehicles, the first of which is a sedan named the Lucid Air.
The company says it has plans to open 20 showrooms across the US by the end of 2021. Peter Rawlinson, the company’s CEO and CTO, was formerly a VP of Engineering at Tesla, and has stated that “the Model S was a good first shot” but with the Air, he is “fixing all the mistakes." If Lucid is trying to be the next iteration of Tesla, then surely going public is in its crosshairs. What better way than a SPAC right now?
Then there’s Lordstown Motors. It raised $5 million to acquire a former General Motors plant with the goal of bringing the first all-electric fleet centric pickup to market. The flagship model, called “Endurance” has a proprietary in-wheel hub motor system that reduces the number of moving parts and should, in theory, cut down the ongoing maintenance requirements of the vehicle. One interesting tidbit is that Steve Burns, the company’s founder and CEO, is also the founder and former CEO of Workhorse Group, a publicly-traded EV company with whom Lordstown can trace its roots back to.
Given the company’s near term need to raise significant amounts of capital, and the CEO’s prior experience running public companies, it wouldn’t be too big of a surprise to see Lordstown become the next electric vehicle company to go public by way of a SPAC. In fact, some speculate this may already be in the works.
Who's Left Holding the Bag?
Time will tell what will come of these companies and the countless other EV startups trying to make their mark. For now, SPACs are providing a unique way to go public and raise the much-needed capital to bring the next era of transportation to fruition.
To profit from the ongoing craze, one might think to go out and buy shares of each of the transportation or energy SPACs that have yet to announce an acquisition, and that might work. But, at some point, investment in EV companies is going to become oversaturated and the well will dry up. Investors should ask what the next sub-industry to take off will be, perhaps as a result of what is going on right now. There’s still the problem of publicly accessible charging that needs to be solved, after all.
Tesla’s highly anticipated earnings report for the second quarter is coming out today, and it will be very interesting to see if the stock continues its journey towards $2,000 per share—a half-trillion-dollar market cap—all the while fostering a significant amount of investment into the space and its competition.
Regardless, one thing that is certain is that SPACs are back once again, and they are bigger than ever. That being said, we’d be remiss not to caution readers to think twice before jumping in headfirst to investing in SPACs without advice from a financial advisor. Remember the Global Financial Crisis and crypto craze? At some point, the SPAC market is destined to pull back.
While the companies will have plenty of cash sitting in the bank, investors could be left holding the bag.
Cliff Weinstein and Sam Leffell are contributors to The Drive and founders of Concourse Partners, an investment partnership based in New York.