Privately held companies love bull markets, and with stock markets near all-time highs, it's been a great time for those private businesses to come public. Rather than going through the traditional initial public offering (IPO) process, which can be painful and long, many companies have chosen instead to come public using a special purpose acquisition company (SPAC).

High-profile SPAC wins got investors truly excited about the prospects for investing in the next big disruptive company before anyone else got a chance. That sent SPAC prices soaring. But lately, there's been a huge reversal, and many SPACs have crashed from their lofty heights.

Below, we'll talk about three lessons the SPAC crash has taught investors. First, though, let's take a look at the carnage in the SPAC universe.

Red arrows hitting cracked ground.

Image source: Getty Images.

The rise and fall of SPACs

Until late February, SPACs were on a serious roll. In just three months, some of the highest-profile shell companies had delivered amazing performance. Churchill Capital IV (CCIV) had risen to nearly six times its price from the beginning of December on hopes that it would move forward with a merger with electric-vehicle builder Lucid Motors. Social Capital Hedosophia Holdings V (IPOE), meanwhile, saw its stock more than double on news of a combination with financial industry disruptor SoFi.

Even SPACs that had no immediate prospects for mergers moved sharply higher. Social Capital Hedosophia Holdings IV (IPOD) and Social Capital Hedosophia Holdings VI (IPOF) saw gains of around 40% each, and the Bill Ackman-led Pershing Square Tontine Holdings (PSTH) SPAC was up nearly 20% despite no news at all on the merger front.

PSTH Chart

PSTH data by YCharts.

All that changed in the middle of February. When the stock market started falling from its record levels, growth stocks took the brunt of the hit. That especially included SPACs, since their valuations had largely stemmed from hopes that they would merge with high-growth companies and take advantage of their popularity. As a result, several prominent SPACs crashed to prices far below their best levels.

PSTH Chart

PSTH data by YCharts.

What motivated these declines? Investors finally got a glimpse of some of the downsides of SPACs. In particular, they learned the following three lessons the hard way.

1. When SPACs soar in anticipation of a deal, they can fall after the deal gets done

The experience that Churchill Capital IV had with Lucid Motors shows how unquenchable investor interest can work against a deal. When shares of the SPAC jumped above $60 per share, it made it almost impossible for the SPAC's managers to negotiate a deal that would live up to those high expectations.

In the end, SPAC shareholders got some concessions, the most notable of which was forcing private equity investors to pay $15 per SPAC share rather than the usual $10. But $15 is a lot less than $60. Meanwhile, Lucid knew that Churchill was under crushing pressure to get a deal done, and they were able to hold out and give the SPAC just a 16% stake in the post-merger Lucid.

2. SPACs don't always hold their post-merger premiums

Even when investors are happy about a deal involving their SPAC, it doesn't mean that the shares will necessarily hold on to their post-announcement gains. That's what SCHH V shareholders saw with SoFi, as initial enthusiasm has cooled.

SoFi's business model taps into trends in the fintech space toward consolidated platforms offering the widest possible ranges of financial services in a single place. The success of Robinhood and other companies tapping into technology to make money management easier has fed into SoFi's popularity.

However, now that Robinhood has come under fire because of the recent controversies surrounding short squeezes, some are questioning the staying power of cutting-edge app-based financial services. SCHH V is tied to that business now, so it will rise and fall with the industry's fortunes and SoFi's prospects there.

3. A few bad experiences can weigh on every SPAC in the market

The fundamental case for SPACs involves having confidence that a management team can find a suitable company, negotiate a great deal, and then help the target execute on its business strategy. When that works well, it's a thing of beauty for investors. But it doesn't always work, and when it doesn't, it depresses the market for every other SPAC.

You can see that in the way SCHH IV and SCHH VI have traded lately. Big drops don't reflect impatience with their coming up with candidate companies for merging. Instead, they acknowledge the possibility that CEO Chamath Palihapitiya won't find the best possible merger target or that the deal he negotiates might not unlock full value for SPAC shareholders.

A buying opportunity?

Like any investment, SPACs can go in and out of favor. Share prices can be volatile.

For those who still see the potential in SPACs, now is a far better time to buy than when they were soaring into the stratosphere. A dose of reality has brought valuations more into line with future prospects, and that makes the top SPACs look more attractive.