SPACs break the 2020 record in just three months, but the ardent industry is facing challenges
Traders work during the opening bell on the New York Stock Exchange (NYSE) on March 5, 2020 on Wall Street in New York City. (Photo by Johannes EISELE / AFP) (Photo by JOHANNES EISELE / AFP via Getty Images)
Photo by Johannes Eisele | AFP | Getty Images
It only took the SPAC market three months to surpass its record year 2020, but maintaining this staggering growth will not be an easy task.
The funds acquired through US special-purpose vehicles totaled $ 87.9 billion in 2021 and, according to SPAC Research, already exceeded the issuance of $ 83.4 billion in all of last year.
SPACs raise capital on an IPO and use the money to partner with a private company and get it public, usually within two years.
“It seems like everyone is getting called about these SPACs. The SPACs are knocking on their doors,” said Dana D’Auria, Co-CIO, Envestnet PMC. “Of course, if there is such a market, you only have to worry about the long-term return potential.”
The ardent industry faces a myriad of challenges to keep up with its meteoric rise.
With more than 400 deals currently searching for targets, there can be few good quality companies out there. SPAC IPO stocks, many of which saw heightened speculative trading activity, have proven to be vulnerable to general market volatility. Meanwhile, higher interest rates make these growth companies – which are often pre-revenue and pre-cash flow companies – less attractive.
“When companies that depend on future earnings keep raising interest rates, they are more vulnerable than bigger, more mature tech names,” said Quincy Krosby, chief marketing strategist, Prudential Financial.
“They don’t have strong balance sheets and sometimes they don’t even have a business,” she said. “The endangered parts of the market will be at risk.”
The proprietary CNBC SPAC 50 index, which tracks the 50 largest pre-merger blank check businesses by market capitalization, fell more than 7% in March. That decline wiped out the index’s gains for 2021.
The CNBC SPAC Post Deal Index, which is made up of the largest SPACs to hit the market that have announced a target, was also negative in the year under review. The decline was due to a surge in bond yields rocking the stock market, especially growth tech names.
“Mid-market groups that previously lacked the sophistication to orchestrate an IPO want to talk about SPAC IPOs,” said Anthony DeCandido, partner at RSM LLP.
“With so many distressed companies facing liquidity problems from Covid, there will still be a longer buying opportunity for those groups that have capital to bring them to market,” he said.
The explosive popularity in the SPAC market has also drawn a ton of athletes and other celebrities, including NBA star Shaquille O’Neal, Alex Rodriguez and musician Ciara Wilson. The Securities and Exchange Commission warned of celebrity-backed SPACs last week and urged investors to think twice before getting started.
To prove that the market is not just a cautionary story on Wall Street, SPACs are evolving their structure to become more investor friendly and reduce the oversized benefit to sponsors.
Sponsors of blank check companies receive so-called “promotion fees”, which usually entitle them to 20% of the shares outstanding after the IPO either free of charge or at a high discount. This reward usually results in instant dilution for the target company’s shareholders.
Some recent deals sought to bridge the gap between the returns that insiders make and the average stockholder.
Earlier this year, Morgan Stanley developed a new structure called the Stakeholder Aligned Initial Listing (SAIL) vehicle, which promotes sponsors in increments based on stock performance.
“The idea in the past that you have this pump-and-dump approach, where you organize something and get something there, and before the price is watered down by additional property, these guys and girls are out … I see that Not.” DeCandido added that he had seen interest in deals with a 5% advertising fee.