NEW YORK (BLOOMBERG) – Betting on flashy names like Shawn “Jay-Z” Carter, Shaquille O’Neal and Martha Stewart to boost blank-cheque companies this year left investors mostly in the red.
Just about the nicest thing you could say about celebrity-backed special purchase acquisition companies (Spacs) and the firms they brought public is that they have lost less for investors than benchmarks for the whole Spac category. After that, things get ugly: 21 out of 33 Spacs tied to famous public figures have posted negative returns for this year.
Not counting the Spac tied to former United States president Donald Trump, which minted a phenomenal gain of more than 400 per cent, the rest of the group averaged an 11 per cent drop through Dec 13, with rapper Jay-Z’s 84 per cent plunge the worst of the bunch. Only two managed gains of more than 10 per cent, trailing far behind the S&P 500’s 24 per cent rally.
It’s a stark and expensive lesson: While an A-list person can attract attention for a blank-cheque company amid a US$155 billion (S$211 billion) glut of new offerings, it hardly ensures superior returns.
“Celebrities are eye candy, unless there’s really good reasoning to have them on board,” said Mr Matt Tuttle, whose Tuttle Capital Management runs a bevy of exchange-traded funds holding Spacs and firms they have merged with. “At some point, these companies need to deliver on a real mission, and it becomes less about the marketing and more about the strategy.”
In part, the sector’s carnage stemmed from being overrun by nearly 600 new and mostly undistinguished Spacs. The companies raise money through an initial public offering, with the promise that their experienced managers will buy a business that has yet to be determined – thus the “blank-cheque” moniker.
Among winners in 2021, stocks with a range of ties to Mr Trump and conservatives have dominated. CF Acquisition Corp VI, the Spac sponsored by Cantor Fitzgerald that is taking video platform Rumble public, rallied 20 per cent. Trump Media and Rumble announced a partnership on Tuesday, and the platform boasts commentators like Russell Brand among their biggest contributors.
The appeal of the former president and his followers stands out in the world of celebrity-tied Spacs, according to Dr Jay Ritter, a University of Florida finance professor. “For better or worse, his pull in a certain segment can add a lot of value,” Dr Ritter said.
Polestar, an electric-car maker backed by actor Leonardo DiCaprio, rewarded investors with a 17 per cent rally for the Spac it is tied to as electric vehicle stocks rallied this year. Driverless tech start-up Aurora Innovation, which has ties to LinkedIn co-founder Reid Hoffman and Zynga founder Mark Pincus, beat the S&P 500 with a 31 per cent gain.
Losers include Jay-Z’s cannabis-focused The Parent Company, fitness company Beachbody – the result of a deal with ties to former Walt Disney executives and Shaq – and AppHarvest which counts home decor guru Martha Stewart among its board members. Each has shed at least two-thirds of their value during 2021.
Other members of the celebrity cohort hovering near record lows include DNA-testing company 23andMe which drew retail investors when it went public through a merger with a Spac founded by billionaire Richard Branson.
Even Microsoft founder Bill Gates could not reproduce his magic: Evolv Technologies Holdings, a company he backed that uses screening technology to keep weapons out of public venues and workplaces, is off 51 per cent. Tennis legend Serena Williams was on the board of the Spac that brought public Velo3D, which is down 25 per cent.
As for the lacklustre returns, shareholders cannot say they were not warned. The Securities and Exchange Commission was so alarmed back in March about celebrity Spacs that it issued a bulletin warning off investors.
“It is never a good idea,” the agency said, “to invest in a Spac just because someone famous sponsors or invests in it or says it is a good investment.”