SPAC sponsors were winners even on losers

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."

Precise sponsor returns can be difficult to track. Sponsors usually only report individual sales if they serve on merged companies’ boards or hold large stakes. Hedge-fund managers that run SPACs also report quarterly holdings.

Silver Spike Holdings LP, a cannabis-focused investor, invested $7 million in a SPAC that merged last year with WM Technology Inc., a marijuana software company previously known as Weedmaps. While its stock is near an all-time low and down over 80% from the initial merger, Silver Spike is poised to profit. It hasn’t had to report its holdings since late 2021, but its initial investment would be worth about $11 million today.

For sponsors that sold shares of companies that increased in value, gains were particularly lucrative.

Apollo Global Management Inc. put $14 million from an Apollo-run fund into a company that merged with the electric-vehicle company Fisker Inc. in 2020.

Apollo sold at least $64 million of shares in the first quarter of 2021, and disposed of its remaining 12.9 million shares at some time in the second quarter of 2021, records show. Based on Fisker’s lowest share price in the second quarter, Apollo would have garnered about $140 million from those sales.

The profits came as Fisker’s share more than doubled to above $20 soon after the merger. Fisker’s share price has since fallen to less than $7 from its $10 initial merger price. Had Apollo held its shares, it would still be sitting on a gain of more than $70 million.

Cantor Fitzgerald’s arrangement with AEye and other SPACs was more complex than that of the typical sponsor. Cantor, which has an investment-banking arm, also served as the underwriter of the initial IPO of the SPAC, generating about $4 million in fees, securities filings show. Then, when the SPAC merged with AEye, it received $25 million more in fees for marketing, merger advisory and acting as the placement agent for a slug of additional investment in the deal, securities filings show.

It disposed of one million shares in the first two quarters of 2022. If it had sold at the lowest share price during those quarters, it would have brought in $2.3 million.

Cantor held $6.5 million in AEye stock as of June 30.