Creators Could Lose Over $1B of At-Risk Capital in 2023 as SPAC Frenzy Dies
The latest trend of private companies flooding Special-Purpose Acquisition Companies (SPACs) to gain public listing without the traditional IPO hassle seems to be bust. According to Matt Simpson, a SPAC investor, the frenzy, which gained popularity in 2021 to raise capital, is now a ticking time bomb.
Amidst the current sell-off in stocks, SPACs are running out of time to locate firms to take public and risk being squeezed. This leaves architects of mergers at the risk of incurring significant losses without deals falling through.
SPAC Companies Perform Worse Amidst High Inflation and Rising Rates
The general decline in SPAC mergers is seen in the performance of companies merged through it. An exchange-traded fund that tracks these firms shows that they are down 30% year to date, a more significant drop than the general market.
Consequently, the situation has led to a ramp of SPAC cancellations in 2022, with Acorns Growths opting to raise money privately instead. The general decline in SPAC mergers has come about due to rising inflation and the Federal Reserves’ increasing hawkishness with interest rates. This has led investors to take a more risk-free approach by reducing their exposure to risk-on assets with a predicted recession.
Furthermore, US regulators recently proposed new rules that hold banks liable if a SPAC misleads investors. This has caused Goldman Sachs and other banks to wind down their SPAC involvement, seemingly confirming the end of the SPAC boom.
Although isolated, Goldman Sachs’ actions are significant, considering banks played an active role in fueling the SPAC boom. Banks handled fundraising, earned huge windfalls, and awarded handsome bonuses as over $250 billion was raised by companies seeking to go public. However, the new regulation leaves them at risk of huge liabilities while the SPAC mergers become increasingly difficult and complex.
Inevitably, the retreat of Banks should spell the end of the SPAC frenzy which came to the fore during the pandemic. The covid-19 crisis made it difficult to stage traditional IPOs, so SPAC deals became the go-to. Consequently, SPACs mergers exploded over the last two years, going from 59 in 2019 to 248 in 2020. In 2021, the total number of deals toppled all records at 613, as seen in the chart.
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SPAC Creators Could Lose At-Risk Capital Without Deals
At the moment, the SPAC decline has put its creators in a race against time to close mergers and prevent losing their at-risk capital. This capital is money that they have already spent setting up the SPACs and will never get back if deals are not closed. The current projection puts the possible loss at over $1 billion by early 2023.
However, if these creators can close the merger deals, they stand to make several times their capital due to the structure of the arrangements. SPAC acquisitions are unique in their creators have a period of two years to take a company public. Failure to do so would see them return the at-risk capital to investors and forfeit the average $5-10 million paid up front. This structure makes SPAC deals faster and less expensive than traditional IPOs.
According to data from SPACresearch.com, 2020 saw about 248 SPAC IPOs issued to the tune of $83.4 billion. Among these, at least 65 of them face looming deadlines between now and the end of the year. Extending the time frame to the first quarter of 2023 puts the number at a staggering 280.
Consequently, analysts believe that a majority of those blank-check enterprises will not find mergers if the current rate of SPAC deal-making continues. With the merger windows closing more companies who previously considered SPAC mergers are now opting to remain private.
Do you think SPAC merger deals have run their course with banks now averse to partaking in them? Let us know your thoughts in the comments below.