The market for specialty companies has become an unexpected victim of the Archegos Capital Management scandal, as banks are reluctant to lend to hedge funds that have invested heavily in empty enterprises.
All Wall Street banks have become more cautious about how much leverage they can distribute to their customers after collapse By Archegos, led by Bill Hwang, which forces hedge funds և family offices to reconsider their investments in Spacs, according to several market participants.
“Basic brokerage conditions have generally been tightened as a result of Archegos,” said a senior banker working on Spac deals. “Most of the return on hedge funds comes from the leverage they use. It was a train with seeds when it was unloaded.
The lack of leverage undermines the hedge fund investment strategy, which has played a major role in boosting Spac’s boom, usually by investing at an early stage and not staying there long.
These investors receive a share of Spacs shares before they are listed for $ 10 each, and the cash raised by the company is put into accreditation by the US Treasury.
By using borrowed money, the result is a more lucrative return on assets than the underlying asset, which many consider risk-free.
Many hedge funds are then sold if there is a “pop” in the stock price, or they repay their investment when the time comes for shareholders to vote for a final merger with the existing company.
Such investments have been particularly profitable when retailers raise shares in Spacs on a sponsor basis. star statusHowever, leverage is dwindling, interest in empty enterprises is waning, and recent hedge fund revenues will be difficult to reproduce.
Leverage restrictions for the Spac market are են one direction after the 2020 blockbuster և 2021 bubble. The performance has intensified In recent months, the backlog of technology resources, as well as regulatory and accounting issues.
“We see this in price action when stocks are trading at a lower level because banks do not offer leverage as freely as they did, and now they are more expensive,” said Matthew Simpson, Wealthspring Capital’s managing partner. invests in Spacs.
According to Refinitv Financial Times analysis, more than 80 percent of Spacs who are still earning targets are now selling for less than $ 10, at the level at which shares in open-end companies are the initial public offering price. :
“All the rocket fuel came out of these items. If hedge funds were allowed to leverage, hedge funds would raise all Spacs to buy trading for $ 10, ”said Matthew Tuttle, CEO of Tuttle Capital Management, who runs the Spacs exchange fund.
It is difficult to give exact figures on how much leverage was previously provided to Spacs hedge funds or the amount of recent withdrawals, but industry participants said they saw companies use nine levers before the Archegos was blown up. : up
“Prime brokers have taken the crazy levers back from Archegos,” said one Spac investor.
A hedge fund manager who spoke to several major brokerages about using leverage to invest in Spac said they had been repeatedly told they had reached their limits.
However, some market experts say that Archegos’s sowing was one of the factors in the Spacs refrigeration market, and in general, for low-appetite companies. According to Refinitiv, the number of launches has slowed down to a drop. Only 13 Spacs were reported in the US last month, up from 110 in March.