Barry Sternlicht, who started six SPACs, hopes the 'public is not led to slaughter' in bad deals

Published Wed, Mar 24 202112:16 PM EDTUpdated Wed, Mar 24 202112:17 PM EDT

Barry Sternlicht told CNBC on Thursday he's concerned about the flood of special purpose acquisition companies coming into the market, warning the quality of some deals could be bad for investors. Sternlicht, chairman and CEO of Starwood Capital Group, has himself been involved with starting six SPACs. He said, "Three that are completed and three that are filed." In an interview on "Squawk Box," Sternlicht said that not at all SPACs are created equal. "We've returned 20% compounded for 30 years at Starwood Capital Group in real estate, and we know how to structure deals. We know how to evaluate deals," the billionaire investor said. "There's a lot of rookies out there and just beware," he said, without mentioning any specific names. "I hope the public is not being led to slaughter." SPACs raise money through an IPO with the purpose of later merging with a private company, thereby taking it public. The deals are often accompanied by PIPEs , or private investments in public equity. While SPACs boomed in popularity last year during the coronavirus pandemic, the amount of money raised by these so-called blank-check firms in 2021 has already exceeded all of 2020. Sometimes, a SPAC has a high-profile investor or individual affiliated with it. The Securities and Exchange Commission earlier this month warned against investing in a SPAC simply because a celebrity is involved . "The public in many cases is just playing venture capital and like any venture capital portfolio, three will work and seven will die. Hopefully, if you do them all, you'll make some money," Sternlicht said. "But if you're careful, this is a legitimate business. This is a legitimate way for companies to go public." Sternlicht's first SPAC, Jaws Acquisition Corp. , unveiled its intentions to combine with Cano Health in November . On Tuesday, his Jaws Spitfire Acquisition Corp. announced a reverse merger with 3D printing tech company Velo3D, which counts Elon Musk 's SpaceX as one of its customers . "Elon wanted to buy Velo3D. They didn't want to sell, so we had an opportunity to take them public," said Sternlicht, adding that Ron Baron's investment firm led a $155 million PIPE as part of the deal. Baron is a longtime bullish investor in Tesla , where Musk serves as CEO. Sternlicht said there are worrisome signs for the broader SPAC landscape, noting shares of some of them have soared before the blank-check firm has even announced its potential merger. Typically, when a SPAC goes public, it prices its shares at $10 apiece. "I mean, the market is incredibly speculative," he said, citing some of the Reddit-fueled trading action that also transpired in established companies like GameStop . "That made its way to the SPACs, and the SPACs were hot. Now there's so many deals that the public doesn't even know what to do." He added, "Companies are going public with a name; they go up before anybody even knows what they do." The frenzy around SPACs will wane, Sternlicht said, suggesting there are were already signs a calming was underway. For example, he said institutional firms that often partake in the PIPE rounds accompanying SPACs have lately been more discerning, taking more time to consider their participation in the deal. "Everyone is doing a SPAC because if Wall Street can sell it, they'll sell it. Now the market has changed. The discipline is now coming from the buy side," he said. "The guys doing the PIPEs are saying, 'Hey, you're paying too much,' or, 'I don't like that deal,' or, 'recut the deal.'" Markets typically correct themselves over time, Sternlicht said, and SPACs are no different. "It's settling down, but there will be incredibly dumb deals. Unbelievably stupid investments will come your way. What will shut the door is when the SPACs redeem, when the cash in trust redeems, and they get their $10 back and people feel it's not just a free lunch. Right now, it's been a free lunch." Watch the full interview with Starwood Capital's Barry Sternlicht above.

Barry Sternlicht

Cameron Costa | CNBC

Barry Sternlicht told CNBC on Thursday he's concerned about the flood of special purpose acquisition companies coming into the market, warning the quality of some deals could be bad for investors.

Sternlicht, chairman and CEO of Starwood Capital Group, has himself been involved with starting six SPACs. He said, "Three that are completed and three that are filed."

In an interview on "Squawk Box," Sternlicht said that not at all SPACs are created equal.

"We've returned 20% compounded for 30 years at Starwood Capital Group in real estate, and we know how to structure deals. We know how to evaluate deals," the billionaire investor said.

"There's a lot of rookies out there and just beware," he said, without mentioning any specific names. "I hope the public is not being led to slaughter."

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