What a falling off was there.
After the extraordinary boom in new special purpose acquisition companies (Spacs) in 2020, when 248 IPOs of blank-cheque companies raised $83 billion – up from 59 listings worth $13.6 billion in 2019 – the first quarter of 2021 saw a frenzy.
During the first three months of this year 320 Spacs went public raising $88.5 billion, with 100 in March alone in the US, plus another seven in Europe and Asia.
In April, there were just 12. And after three weeks of May, there had been the same number.
Daily trading volumes have collapsed and so have prices, with shares in three quarters of Spacs now changing hands at below issue price.
Why has the mood changed so suddenly and so sharply?
There are two reasons.
Spacs that listed early in 2020 and have still not found a target will become desperate to do any deal before they have to hand that cash back
First, the pace of new issues had become unsustainable. Most de-Spac mergers, the key moment when these companies find their target, come with a large capital raise through a private investment in public equity (Pipe).
There are only so many providers of these injections, including certain pension plans and sovereign wealth funds, as well as late-stage venture capital and growth investors. They are large institutions and can write big cheques.
But the Pipe market is small. It can only process a limited number of deals. These investors are not going to bother with newer Spac sponsors with limited track records.
Realizing this has made the hedge funds, which park cash in Spacs so as to retain an option on a sponsor finding a great target, nervous. In the months ahead, Spacs that listed early in 2020 and have still not found a target will become desperate to do any deal before they have to hand that cash back. Some bad ones will be attempted.
Cool down
Second, wary of this, the SEC has decided to take the heat out of the market. Craftily, the US regulator did not change any rules. It simply asked a couple of arch questions: one technical (on the equity accounting treatment of Spac warrants and whether they are really liabilities), and a bigger, conceptual one.
Promoters of Spacs highlight the virtue of target companies being able to set out in more detail to Pipe investors their projections of future revenues and profits. This is crucial to valuing tech companies in particular. Advocates contrast this with the limitations in marketing to retail investors in IPOs.
The SEC simply asked in April: are you sure you’ve got that right? Because there are hefty liabilities around misstatements in any securities offering.
It’s not game over for Spacs, but they may never see another run like the 12 months to the end of March
The SEC went so far as to float the notion that the de-Spac, when a private company reverses into a listed vehicle that then trades as the target, is in fact the real IPO here and not the earlier listing of the cash shell.
It’s not game over for Spacs, but they may never see another run like the 12 months to the end of March.
The irony is that the US has clamped down just as European regulators and exchanges keen to attract more listings – none being more desperate than the UK – soften their rules for Spacs.
Company founders may become reluctant to sell to Spacs if they should be seen as questionable in their home market. And while reversing into one is simpler and faster than doing an IPO, at least listing your own company doesn’t require handing 20% of the equity to the Spac sponsor.
