Breakingviews: SPACs and crypto are just the tip of the iceberg

Combining blank checks and cyber coins always seemed like a bad idea. So did matching long-term assets with relatively short-term money, as with the $125 billion Blackstone Real Estate Investment Trust. But what’s scarier for investors is the prospect of blowups in areas they thought were safe. That’s the next shoe to drop.

The manifestation of far-fetched financial ideas came to an end on Monday, when cryptocurrency group Circle Internet Financial called off its merger with a special-purpose acquisition company. The so-called stablecoin issuer, which had a small stake in bankrupt crypto exchange FTX, probably didn’t belong on public markets given regulatory uncertainty and the difficulty of forecasting the volatile sector’s growth. The fact that someone even tried to float it testifies to the bubbliness of recent years.

So too does the sudden change of fortunes at Blackstone’s property vehicle known as BREIT, which pairs relatively liquid investor cash with real-estate assets that are hard to sell quickly. The fund had safeguards in place, only allowing withdrawals of 2% of net asset value per month. But last week after investors rushed for the exit, it hit that trip wire, sending shares of the $100 billion asset manager tumbling.

These problems were relatively obvious, hence the guardrails. But other, murkier, issues linger. Take buyout valuations. In 2021, Thoma Bravo paid a 34% premium for cybersecurity outfit Proofpoint. At roughly 12 times revenue, the deal was then in line with Microsoft’s multiple. Thoma Bravo announced a deal to buy Anaplan for 14 times estimated revenue in March this year. Microsoft’s multiple is now 9 times revenue. Some private-equity managers that invested at the top of the cycle may now be sitting on paper losses. How that works through the system, and whether they must realize any losses, remains to be seen.

Some private credit funds, meanwhile, were until recently lending against companies’ revenue – an unprecedented practice. All in, investors gobbled up some $580 billion in U.S. speculative grade loans in 2021, according to data from S&P Global Ratings. In the esoteric derivatives world, the Bank for International Settlements reckons that pension funds and non-bank institutions are sitting on $80 trillion of hidden, off-balance-sheet dollar debt in foreign exchange swaps. The crypto and SPAC collapse shows that some of the most egregious models of the go-go years are coming undone. But the real risk is hiding elsewhere.

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