27th Aug 2021
2020 saw astonishing SPAC activity, with 248 SPACs raising over $83.4 billion that year 1, compared with just 194 in the 6 years between 2013 and 20192. It continued into the first few months of 2021, with 319 SPACs going public in Q13, but Q2 2021 saw SPAC activity drop considerably. Those looking to invest in SPACs should read on to take a deeper look at recent movements.
Those financial thought leaders who have long been negative about SPACs were quick to claim the cooling off as proof of their argument, but June saw SPACs warm up again. It seems that Q2 2021 represented a much-needed pause in what was in danger of becoming an overheated market, but that investors are welcoming SPACs as an alternative to Venture Capital funding.
It was time for SPACs to slow down
Analysts agree that the SPAC market overheated in 2020, but disagree about whether the slowdown of spring 2021 was a beneficial pause, or the harbinger of doom.
A number of people have been warning for a long time that SPAC owners are liable to overstate predictions of positive performance. SPAC sponsors and targets have generally enjoyed “safe harbor” provisions regarding forward looking statements, which don’t apply to traditional IPOs, protecting them from a level of liability if their predictions don’t materialize.
To be fair, their anxiety was not unfounded. The electric truck manufacturer Lordstown Motors admitted this month that it had exaggerated the number of orders it had in the pipeline and might run out of money, even though it had earlier assured investors that it had sufficient runway4. These anxieties weren’t helped by a recent report slamming DraftKings, one of the highest-profile SPACs, as “A $21 billion SPAC betting it can hide its black market operations5.” However, others have pointed out that the DraftKings’ complaints center around SBTech, just one company owned by DraftKings which isn’t part of its SPAC6.
Leading financial analyst and hedge fund manager Jim Chanos accused some SPAC owners and startup leaders of deliberately exaggerating their prospects to attract retail investors. “As the boom has gone on, we suspect that more and more companies are playing . . . fast and loose with their projections in order to entice investors to commit capital,” he said7.
It seems like the slowdown in April and May of this year was largely due to the SEC taking heed of these warnings. In April, the SEC announced guidance that SPAC warrants should be reclassified as liabilities instead of equities, which forced SPAC owners to consult legal advice and restate their finances to match the new requirements. SPACs would no longer be able to offer warrants as sweeteners to attract more investors8.
But the change has been far from catastrophic. There were some losses, as deals in the pipeline were put on hold and prospective ones delayed for deeper inspection, but sources say that they were mainly paper losses and didn’t cause significant harm9. Most SPAC leaders recognized that things had been moving too fast, and weren’t opposed to the new guidance. Sponsors were creating SPACs and leading acquisitions within a matter of months, driving deals at a pace that the SEC could not match. Frequently, the SEC didn’t even have time to review them for basic filing errors. Although they grumbled at the headache, by and large, SPAC owners went back and restated their finances without protest10.
Risk is part of the SPAC game
In contrast to gloom-mongers who warn that SPAC predictions are fooling inexperienced investors, SPAC-supporters argue that everyone should know that SPACs are high risk, high reward bets. Analyst David Drapkin points out that this is the beauty of SPACs; they opened up access to the kind of deals that were previously only available to venture capitalists. “Some will succeed, some will fail, but SPACs will perhaps make these successes and failures that much [more] visible to the public eye.”11
Startups looking to go public have always painted their prospects with a positive slant, and investors should be aware of that from the beginning. Matt Levine, finance columnist for Bloomberg, notes “the SPAC boom did not invent, like, the concept of visionary founders overpromising to investors. What the SPAC boom did that is interesting is make it much easier for visionary founders to overpromise to public investors.”12
Indian-American venture capitalist Vinod Khosla tweeted his own warning to investors, while defending SPACs as a concept13.
It’s worth noting that even the SPAC-skeptical Chanos has invested in SPACs as a long-term investment. 14
Hot SPAC activity in June
The past month’s SPAC activity makes it difficult for pessimists to claim the market has run out of momentum. June 2021 saw approximately 12 mergers worth more than $1 billion; fewer than in the early part of the year, but testimony to the market’s good health15. More than $100 billion has been raised globally via SPACs so far this year, and more than 400 SPACs are looking for targets16.
There’s considerable interest around the prospect of Bill Ackman’s SPAC, Pershing Square Tontine Holdings, acquiring a share of Universal Music Group (UMG). Technically speaking, this isn’t an acquisition but the purchase of a 10% stake in the corporation, which is going public independently17. The deal is worth $4.1 billion, and interestingly, Pershing Square Tontine’s executives will be taking a smaller portion of the shares for a larger fund commitment, rather than taking 20% for a nominal fee as had become the norm. It’s thought that this is to help them focus on long-term performance rather than a spectacular one-off deal.18
Another reason for all the attention paid to the Pershing Square Tontine-UMG merger is that it could herald a new twist on the SPAC tale. The UMG acquisition will still leave around $1.5 billion in the SPAC kitty, but the executives will be able to take their time in finding a target because the UMG deal meets their obligation to close within 2 years. 19
Additionally, Pershing Square Tontine is offering investors one SPAR, or special-purpose acquisition right, in its new Special Purpose Acquisition Right Company (SPARC), for every share they hold in the original SPAC. The SPAR is like a warrant that allows investors to buy a share in the future SPAC at $20 a share, but only after they have announced a new merger target. Ackman indicated that he’ll go on to create several SPARC vehicles, with all the original Pershing Square Tontine Holdings shareholders receiving shares in each in perpetuity. The new SPARC will have up to 10 years to find a target. It remains to be seen what kind of impact this will have on the SPAC market.20
Another media SPAC deal is that of Buzzfeed, the digital media company, which was acquired by 890 Fifth Avenue Partners at a valuation of $1.5 billion. Buzzfeed also intends to acquire Complex Networks, a digital publisher, as part of the deal, in order to improve its revenue growth. Buzzfeed sees the move as a way to strengthen its capability to acquire other digital media companies and expand its reach.21
June saw a number of FinTech SPAC deals, including the merger of Israeli digital payments company Payoneer with FTAC Olympus Acquisition Corp., at a valuation of $3.3 billion22, and for the new FinTech company Flywire which specializes in online payments for education, healthcare, and travel verticals23.
Recent SPAC deals have spanned the gamut of industries and verticals24. In the tech arena, we saw the UK aircraft startup Vertical Aerospace announce a merger with Broadstone Acquisition Corp. for $2.2 billion; Solid Power, a company that makes rechargeable batteries for electric vehicles (EVs) merged with the Decarbonization Plus Acquisition Corporation III at a valuation of $1.2 billion; and the Kensington Capital Acquisition Corp decided to acquire Wallbox, the Spanish startup making EV charging stations, for $1.5 billion25. Quanergy Systems, which makes lidars, a crucial component in every autonomous vehicle, will be acquired by the CITIC Capital Acquisition Corp. for $1.4 billion26, and the 5G and renewable infrastructure service provider QualTek is merging with the Roth CH Acquisition III Corp. in a deal valued at $829 million27. Ecommerce company Boxed is merging with the Seven Oaks Acquisition Corp28; agritech startup Local Bounti is entering a deal with Leo Holdings III Corp valued at $1.1 billion29; and GS Acquisition Holdings Corp II acquired the biotech company Mirion Technologies for $2.5 billion30.
Corrected expectations are driving SPACs
It seems like today’s SPAC investors have adjusted their expectations. Like Chanos, they want to buy in at or below $10 a share, recognizing that higher prices with no deal attached aren’t likely to lead to good yields. The new, lower prices are widely considered a positive sign for the market, rather than an indication that it’s losing steam.
Now we’ve seen a greater volume of SPAC deals, analysts have been able to spot patterns that weren’t immediately obvious. For example, it’s been noted that many SPACs drop in value shortly after announcing a target, but then jump again around the merger vote or after de-SPAC31, so it may no longer be necessary to worry excessively when share prices slump.
In the words of Mitch Nussbaum, co-chair of capital markets and corporate practice at Loeb & Loeb: “In the short run, we may simply not be able to measure up to the exuberance that we experienced this past year. But this past year has sealed the deal that the SPAC has become vital and central to the capital markets and M&A universe.” 32
A survey of investment professionals by Katten found that 72% agree that SPAC IPO activity will increase throughout 2021. 2021 seems to have brought SPACs to a place of more restrained predictions, more reasonable prices, and more realistic expectations that make them an accepted and solid alternative to Venture Capital funding.
1“The SPAC Boom, Visualized,” Elliot Bentley, February 10, 2021. https://www.wsj.com/articles/the-spac-boom-visualized-in-one-chart-11612962000
2“SPACs are becoming less of a sure thing as the deals get stranger, shares roll over” March 4, 2021, CNBC https://www.cnbc.com/2021/03/04/spacs-are-becoming-less-of-a-sure-thing-as-the-deals-get-stranger-shares-roll-over.html
3 “SPACs are becoming less of a sure thing as the deals get stranger, shares roll over” March 4, 2021, CNBC https://www.cnbc.com/2021/03/04/spacs-are-becoming-less-of-a-sure-thing-as-the-deals-get-stranger-shares-roll-over.html “SPAC transactions come to a halt amid SEC crackdown, cooling retail investor interest” April 21, 2021 https://www.cnbc.com/2021/04/21/spac-transactions-come-to-a-halt-amid-sec-crackdown-cooling-retail-investor-interest.html
4 “Lordstown Motors rues broken promises after disappointing investors” June 18, 2021 https://www.ft.com/content/7bd08074-c61c-422b-a637-0c309ef847d4
6 “DraftKings, Lordstown Reignite SPAC Criticisms” June 15, 2021 https://www.thestreet.com/boardroomalpha/spac/spacs-draftkings-ride-criticisms
7 “Spac boom is creating ‘castles in the sky’, Jim Chanos warns” June 25, 2021 http://ft.com/content/da44b18e-51e5-40ab-9e34-70879952edce
8 “SPAC Deals Slow Dramatically After Move by SEC” June 21, 2021 https://labusinessjournal.com/news/2021/jun/21/spac-deals-slow-dramatically-sec-changes/
9 “SPAC Deals Slow Dramatically After Move by SEC” June 21, 2021 https://labusinessjournal.com/news/2021/jun/21/spac-deals-slow-dramatically-sec-changes/
10“SPAC Deals Slow Dramatically After Move by SEC” June 21, 2021 https://labusinessjournal.com/news/2021/jun/21/spac-deals-slow-dramatically-sec-changes/
11 “DraftKings, Lordstown Reignite SPAC Criticisms” June 15, 2021 https://www.thestreet.com/boardroomalpha/spac/spacs-draftkings-ride-criticisms
12 “Lordstown’s Electric-Truck Orders Were Vague” June 15, 2021 https://www.bloomberg.com/opinion/articles/2021-06-15/lordstown-s-electric-truck-orders-were-vague
14 “Spac boom is creating ‘castles in the sky’, Jim Chanos warns” June 25, 2021 http://ft.com/content/da44b18e-51e5-40ab-9e34-70879952edce
16 “Spac boom is creating ‘castles in the sky’, Jim Chanos warns” June 25, 2021 https://www.ft.com/content/da44b18e-51e5-40ab-9e34-70879952edce
17 “A Fintech IPO to Watch and a Very Complex SPAC Deal” June 16, 2021 https://www.fool.com/investing/2021/06/16/a-fintech-ipo-to-watch-and-a-very-complex-spac-dea/
18 “William Ackman SPAC Nears $40 Billion Universal Music Deal” June 6, 2021 https://eminetra.com/william-ackman-spac-nears-40-billion-universal-music-deal/579936/
19 “A Fintech IPO to Watch and a Very Complex SPAC Deal” June 16, 2021 https://www.fool.com/investing/2021/06/16/a-fintech-ipo-to-watch-and-a-very-complex-spac-dea/
20 “A Fintech IPO to Watch and a Very Complex SPAC Deal” June 16, 2021 https://www.fool.com/investing/2021/06/16/a-fintech-ipo-to-watch-and-a-very-complex-spac-dea/
21 “BuzzFeed announces plans to go public via SPAC, targets $1.5 billion valuation” June 24, 2021 https://www.cnbc.com/2021/06/24/buzzfeed-announces-plans-to-go-public-via-spac.html
22 “Payoneer set for Nasdaq listing as SPAC approves merger” June 24, 2021 https://en.globes.co.il/en/article-payoneer-to-begin-trading-on-nasdaq-after-spac-approves-merger-1001375750
23 “A Fintech IPO to Watch and a Very Complex SPAC Deal” June 16, 2021 https://www.fool.com/investing/2021/06/16/a-fintech-ipo-to-watch-and-a-very-complex-spac-dea/
24 “Less Angst in SPAC Land + Wallbox in a $1.5B SPAC Deal” June 9, 2021 https://www.thestreet.com/boardroomalpha/spac/wallbox-kcac-spac-healthy
25 “8 Multibillion-Dollar SPAC Deals That Will Upend Mobility Tech in 2021” June 16, 2021 https://observer.com/2021/06/electric-vehicle-battery-air-taxi-spac-deal-2021-roundup/
26 “Lidar company Quanergy to go public via $1.4B SPAC deal” June 22, 2021 https://techcrunch.com/2021/06/22/lidar-company-quanergy-to-go-public-via-1-4b-spac-deal/
27 “SPACs Attack Recap: Looking Back At 5 SPAC Deals, New SPAC Rumors And Headline News” June 20, 2021 https://www.benzinga.com/m-a/21/06/21635285/spacs-attack-recap-looking-back-at-5-spac-deals-new-spac-rumors-and-headline-news
28 “SPACs Attack Recap: Looking Back At 5 SPAC Deals, New SPAC Rumors And Headline News” June 20, 2021 https://www.benzinga.com/m-a/21/06/21635285/spacs-attack-recap-looking-back-at-5-spac-deals-new-spac-rumors-and-headline-news
29 “A SPAC Deal Sprouts For AgTech Company Local Bounti: What Investors Should Know” June 21, 2021 https://www.benzinga.com/m-a/21/06/21625674/indoor-farming-company-local-bounti-the-latest-agtech-company-to-go-public-with-spac-what-investors
30 “Mirion Technologies Gets SPAC Deal With GSAH: What Investors Should Know” June 17, 2021 https://www.benzinga.com/m-a/21/06/21608089/mirion-technologies-gets-spac-deal-with-gsah-what-investors-should-know
31 “The SPAC Tide is Turning Positive” June 9, 2021 https://www.thestreet.com/boardroomalpha/spac/spac-tide-turning-positive-kvsa-kcac
32 “The SPAC world is eager to grow but regulatory threats remain” June 24, 2021 https://www.penews.com/articles/the-spac-world-is-eager-to-grow-but-regulatory-threats-remain-20210624