As investors throw money at IPOs and SPACs, Steve Russell, co-manager of the Ruffer Total Return Fund, says the promise of untold future profits should be discounted back not by interest rates, but by inflation:
“During the pandemic we could have anticipated share buy backs collapsing and companies needing to raise record levels of equity to survive the lockdowns, but who would have predicted IPOs reaching a record level too? Most surprising of all is that SPACs (Special Purpose Acquisition Companies) made up $75bn of that record total, eclipsing the previous record of such issuance in 1999 by over five times.
“SPACs are new companies, coming to the market and issuing shares to acquire other companies, but without the wearisome requirement of actually saying what marvellous opportunities it has identified. This is reminiscent of the 1720s South Sea Bubble, when a speculative boom saw investors throw their money at all manner of unlikely projects and lose fortunes.
“Three hundred years later, confident central banks will keep interest rates at or close to zero, investors assume there is no risk to today’s sky-high tech valuations and are similarly throwing money at profitless IPOs and secretive special purpose vehicles. What could possibly go wrong? In a word: inflation.
“The danger is that markets are focusing on the wrong discount rate. The promise of untold future profits should not be discounted back by interest rates, but by inflation. That is the true measure of the purchasing power of future cashflows, assuming they ever actually materialise. It is inflation, and indeed the fear of future inflation, that could see the current IPO and SPAC mania join the South Sea Bubble as one of the greatest financial follies of all time.”
