9th Jun 2021
Special Purchase Acquisition Companies, or SPACs, have been enjoying a moment for about the last 12 months or so, but this month has seen a sharp change in direction. The question that analysts are discussing is whether the lull in the SPAC boom spells an impending divorce, or just the beginning of a more mature relationship.
SPACs have been around and in use since approximately 1993, but they really grew in popularity early to mid 2020. 194 SPACs were issued between 2013 and 20191, but 2020 saw 248 SPACs raising over $83.4 billion2, and 2021 seemed set to outstrip the previous year by a long way. 210 SPACs went public in January and February 2021 alone, raising $68.5 billion3. By the end of Q1, 64 unicorns had gone public through SPACs, and 328 new ones were formed4.
But April 2021 brought a noticeable change in the SPAC tempo, with both the volume of SPAC deals and the value of SPAC stock dropping significantly. After 109 new SPACs formed in March, the first 3 weeks of April saw just 105.
The IPOX SPAC index fell 20% after peaking at over 900 in February, meeting the technical definition of a bear market.
Past performance does not guarantee future results.
CNBC’s SPAC Post Deal Index, which tracks the largest SPACs that have either announced a target or completed a merger within the past 2 years, lost the gains it had made so far in 2021 and dropped over 20% year-to-date by April 20th6.
Additionally, a number of strong SPAC stocks that had recently completed M&A deals lost a great deal of value. For example, the Churchill Capital IV SPAC made headlines when it acquired Lucid7, the luxury electric vehicle company, but this month it had dropped 64% from its pre-deal value. The Virgin Group SPAC similarly saw share prices fall 44% since the announcement that it was acquiring 23andMe, and the Social Capital Hedosophia Holdings V SPAC (SoFi) was down 40% from its highest point. In the past week alone, 93% of the SPACs that went public were trading at $10 per share or below par value8. Additionally, well over 300 SPACs are still looking for targets9.
It’s been suggested that the sudden SPAC crash is due to an overall dearth of appropriate targets, with David Kostin, head of U.S. equity strategy at Goldman Sachs, commenting that “the blistering pace of issuance is likely unsustainable.” and suggesting that many SPACs would have to settle for low-quality deals or risk liquidation11.
However, it seems unlikely that the market could run out of suitable startups quickly enough to cause SPAC formation to plummet almost overnight. Many analysts suggest we take note of developments at the SEC, which announced that it will be reexamining securities laws for SPACs. At the moment, SPACs enjoy similar rules to a typical M&A deal, allowing SPAC owners to publicize potential gains in share value which might not materialize. SPACs owe much of their popularity to the fact that they make it much faster and smoother for startups to exit. While they don’t typically benefit from the underwriters’ due diligence in a traditional IPO process, SPACs can offer more transparency by avoiding a closed-door valuation that’s hidden from your average investor and even from the founders themselves until the last moment. SPAC shareholders (though not ETF investors) can usually vote on the proposed merger and sell their shares at any time.
John Coates, acting director of the corporate finance division at the SEC, made a statement in which he aired the possibility of making SPAC laws tougher so they will more closely mirror those for traditional IPOs12. If the SEC reclassifies SPACs as liabilities instead of equity instruments, both existing SPACs and SPAC deals that are in the pipeline would have to redo their financial accounting for warrants for each quarter to meet the new requirements. It’s possible that SPAC owners are holding off until they have more certainty.
Despite the drastic changes that April has brought to the SPAC market, a number of analysts remain confident. Writing in the TheStreet, analyst David Drapkin comments that “Overall, this is likely to be a correction of the SPAC market versus its death (again) as the market is already squeezing the irrationality out…. SPACs still represent an attractive low-risk / high reward potential. It’s important to do your due diligence and pick high-quality SPACs with strong investors and operators13“
It’s hard to argue with the sense that SPACs have been getting out of control recently. Celebrity involvement from famous names with little investment experience led retail investors to make investment decisions based more on the fame factor than on the details of the deal. There appeared to be too much hype, and not enough due diligence.
Bloomberg financial columnist Chris Bryant agrees that the SEC’s statements are probably a deliberate attempt to slow down the market, in order to protect inexperienced retail investors who don’t know how to sufficiently investigate a deal, and he views it as no bad thing for the market. As he puts it, seeing SPAC shares trading at around $10 per share is not a calamity, but rather “more like how things should be.” He notes that the wildly inflated SPAC share prices that we saw in 2020 and the beginning of 2021 were unreasonable. People were paying more for the potential and the excitement of a SPAC than for the deal itself, and then prices were dropping when a deal was announced, which was entirely upside down14. “In a “normal” market,” he continues, “SPACs would sell for roughly the per-share value of the cash they hold, at least until they’ve announced a deal. Yet until recently many SPACs were immediately trading at a large premium to their cash holdings. That didn’t make much sense.15“
It’s possible that the slowdown in SPAC mergers owes a lot to a sudden increase in due diligence on the part of SPAC sponsors and shareholders. Early euphoria may have led them to overstate potential gains, while bored investors with little to do during lockdowns were eager for something to get excited about. The warning shot from the SEC, combined with a natural cooling-off experience, may have taught today’s SPACs to take more time to scrutinize deals. As a result, the next wave of SPAC acquisitions might take a little longer to materialize, but be all the more reliable because more time went into completing them. In our opinion, there are still many great opportunities out there – it’s hard to believe that the supply of potentially lucrative startups has dried up – but with more competition and more public scrutiny, SPACs are taking longer to investigate and come to a decision.
The last few months saw a number of SPAC investors who were only in it for the short term gains. There was a profitable trend to “flip” SPACs by buying them early, then selling shares when the price peaked. Hedge funds were shorting SPACs because they saw they were having a bubble moment, and these opportunistic investors were skewing the market. Now that the market is correcting itself, it seems they’re moving on to some other short-term, get-rich-quick opportunity, but we expect the serious long-term investors will stick around. Those who remain will likely be more interested in researching properly before they invest, which slows things down but has the potential to ultimately produce a more stable market.
Overall, the SPAC slowdown seems to be part of the natural rhythm and flow of financial markets. When SPACs were new, sponsors made very generous offers to entice people to invest in SPAC, including extending share warrants with the right to buy stock once it reaches a certain price. But now, there’s so much money flowing in that many sponsors no longer feel the need to work so hard to appeal to investors, so some opportunist investors may have stopped buying. Thanks to the recent stimulus payments in the US, there’s still a lot of liquidity about, and many retail investors who have spent most of the past year saving their money are excited by the idea of investing in new startups. We think entrepreneurs still want to use SPACs to go public so that they can float their company sooner and take advantage of the liquidity. As Mark Twain might have said, reports of the death of the SPAC have been greatly exaggerated.
1 “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
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 “The SPAC Boom, Visualized,” Elliot Bentley, February 10, 2021. https://www.wsj.com/articles/the-spac-boom-visualized-in-one-chart-11612962000
4 “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
5 “Despite SPAC woes, record-breaking run of money into IPOs may continue” April 21, 2021 https://www.cnbc.com/2021/04/21/spacs-are-cooling-off-but-money-may-continue-pouring-into-ipos.html
6 “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
7 “Lucid Motors to Go Public in Merger with Churchill Capital Corp IV, Bolstering Lucid’s Vision to Redefine Luxury, Performance and Efficiency in the Sustainable Electric Vehicle Market” February 22, 2021 https://www.prnewswire.com/news-releases/lucid-motors-to-go-public-in-merger-with-churchill-capital-corp-iv-bolstering-lucids-vision-to-redefine-luxury-performance-and-efficiency-in-the-sustainable-electric-vehicle-market-301232846.html
8 “SPAC trading pops deflate as ‘exuberance and greed’ depart” March 24, 2021 https://www.reuters.com/article/us-spac-usa-trading/spac-trading-pops-deflate-as-exuberance-and-greed-depart-idUSKBN2BG2ZY
9 “Why Has the SPAC Market Cooled Off So Fast?” April 10, 2021 https://www.fool.com/investing/2021/04/10/why-has-the-spac-market-cooled-off-so-fast/
11 “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
12“SPACs, IPOs and Liability Risk under the Securities Laws” April 8, 2021 https://www.sec.gov/news/public-statement/spacs-ipos-liability-risk-under-securities-laws
13 “Cramer says stop the SPAC Deluge: We Agree” March 25, 2021 https://www.thestreet.com/boardroomalpha/spac/spac-cramer-says-stop
14 “SPACs Get Smacked Down by a More Assertive SEC” April 13, 2021 https://www.bloomberg.com/opinion/articles/2021-04-13/the-sec-s-spac-crackdown-may-have-a-chilling-effect
15 “Sorry Folks, the SPAC Party’s Over” March 8, 2021 https://www.bloombergquint.com/gadfly/spac-party-over-cciv-dive-and-chamath-palihapitiya-spce-sale-say-so