SPACs, NFTs and the ‘casino’ economy

Mark Watson-Mitchell is concerned that investors may be exhibiting irrational exuberance when it comes to certain areas of the market.

Are valuations beginning to run away again?

Certain bankers and brokers are getting greedy for very fat fees and, perhaps, are not doing the deep due diligence that should be required when companies float.

Last week’s disaster surrounding the arrival of Deliveroo onto the market must be taken as a lesson.

Same professional ‘spoofers’

And it is interesting to see that those ‘professionals’ that goad investors into taking positions in massively overpriced issues, are the same crew that have tripped investors up before.

They keep on pushing valuation levels higher and higher, for companies that have not yet made any profits and where the turnover is a mere fraction of the anticipated market capitalisation. 

Often, fresh money has been invested by the unwary punters who have been enticed by hopes of turning a quick profit upon quotation.

Due diligence?

Apparently, it does not matter that some companies exploit their workforce while not even giving them proper contracts of employment.

Does that bother the greedy professionals? No, not one iota. They are just chasing the fat fees, so they let certain issues get brushed aside.

That is, until sensible, canny investment managers delve deeper into such newcomers before expending any of their funds.

There used to be almost an obligation that investment clients could get their names upon the lists of various brokers’ and bankers’ new issues only by taking the good with the bad.

Bigger fees from higher prices

But times are changing, hopefully.

And the Deliveroo debacle may prove to be a portent of resistance. The issue price had been falling back all week in reaction to fund manager comments. Then, when it eventually emerged onto the market, its price collapsed by 30%.

Obviously, examples are cited continuously of just how well certain companies have progressed over the last few decades from similar starting modes. 

That really is very long-term investment money just waiting for the big payback. However, all have suffered severe fall-backs before fresh funding took them back onto their progress tracks.

Nothing is new

I have to say that I am getting worried about the current craze for SPACs.

Nothing is new in the market – in various forms ‘special purpose acquisition companies’ have been around for centuries.

‘Cash shells’ have been great business finds for many an entrepreneur that wished to secure a quote for his company’s shares and was in a hurry to see that happen.

Reversing such businesses into clean quoted vehicles has for decades been considered an easy and profitable task.

Generally, those businesses do not suffer the same introspection that newcomers should get when floating.

As for newly created cash vehicles the market is littered with good and bad examples of the success of their missions, their reasons for being and why investors should be involved.

The new craze?

My goodness though, I cannot understand the SPACS craze currently underway.

And what is more, our Chancellor of the Exchequer and his advisers are said to be looking at ways of attracting shed loads of such business into the UK.

Suggestions are that entry criteria will be lessened as temptation to get them onto our markets.

Scary, very scary. 

Companies with less than £200m in turnover and with losses nearly half of their sales are now reversing into ‘blank cheque’ companies creating an overall £5bn plus capitalisation.

The simple question that I ask is can growth justify the gigantic valuations.

Just look at Greensill

I gather that by using a SPAC, the finance group Greensill Capital was expected to achieve a £5bn market value.

I wonder who the bankers and brokers were that could have been fronting that issue to the investment community – I have my guesses that it would have involved the teams previously mentioned.

Greensill did not achieve its target and is now in administration, despite all of the questionable efforts of various politicians and civil servants who, on behalf of the company, were tapping the UK Government for free money and supportive loans.

And now the demise of Sanjeev Gupta’s massive ‘steel empire’ displays a certain inevitability – before Gupta, with Deloitte’s help, then looks to buy back those interests ‘on the cheap’.

Casino economy

Keep on betting on the black and sometime or another it will come up, but have you made money in the meantime? If you keep on using other people’s money, it does not really bother those with nil conscience about doing so.

The recent shorting of various companies has been prolific, even one where more shares were optioned than its total issued capital.

Mega-funds have been caught out as well, with their margins being hit for six as the victim companies fell foul of the market. 

As usual, the deals were funded by massive lines of credit from international banking groups – as a result, they have caught a cold and another hedge fund hits the deck.

Have we seen this before?

We saw some very questionable dealings by the banks in 2006 and 2007, as mortgage debts were bundled up and securitised, before selling off participation in those packages to others in the finance sector.

That the interest payments on those mortgages may never have been paid was of little interest to the bundle creators.

So, come 2008 when the financial crisis loomed, the clever bankers had to be bailed out across the world. 

And the UK Government created the ‘magic’ instrument of ‘quantitative easing’ to support the operations of the financial wizards.

Since that time, the substantial banking bonuses have hardly stopped, nor too did the search for fat fees.

SPACs, NFTs, digital monies – no thanks

I know that I am getting very old. 

I find it difficult to reconcile any true value in bitcoin (where one and all seem to be making mega money), and as for non-fungible tokens – well take me out of here.

I prefer to stand back and let everyone else get rich.

SQCs for me

Very boring of me, I agree, but I enjoy identifying ‘value’ in the companies that I profile within the ranks of the SQCs in the marketplace.

Smaller quoted companies can offer real tangible value. You can see and feel their markets. You can identify with their products and services.

You can see how their products are made or how their services are offered.

Pre-Covid-19 there was nothing that I would enjoy more than motoring across the country to visit this factory or that production line and witness just how they all come together. 

And meeting the various company bosses and executives was similarly important as I achieved better understanding of the companies concerned.

We all dream, at some time or another, of instant riches. Participating in ‘get rich quick’ schemes has absolutely no appeal to me. 

I would rather stick to my ‘humdrum’ world of small caps and continue searching for stocks that could offer my readers around a 25% capital gain in a short timespan based upon investment research and analysis.

Some terms explained…

• A special purpose acquisition company (SPAC) is a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company. 

Also known as ‘blank cheque companies’, SPACs have been around for decades.

(investopedia.com)

• Non-fungible tokens (NFTs) are a class of cryptocurrency assets in which each item, or token, is entirely unique. This makes them useless as a currency, but quite useful for other things – such as crypto art.

(economictimes.com)

An NFT auction works much like an online auction on platforms like eBay. In other words: using Ethereum, a buyer will pay for a jpeg on the NFT auction platform OpenSea and in exchange receive an address on Arweave confirming the purchase and ownership of the image.

(theguardian.com)

• Smaller quoted companies (SQCs) are those firms that are below the market capitalisation of the FTSE 350 index but either have a full listing on the London Stock Exchange or are quoted on the Alternative Investment Market (AIM), or on a non-regulated investment exchange (such as Aquis). 

SQCs have previously accounted for 5% of the total market capitalisation of all quoted companies but 13% of their total sales and 18% of total employment.

(bankofengland.co.uk)