SPAC Promoters Lost $1B+ in 2022, and there’s More Pain to Come
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SPAC Promoters Lost $1B+ in 2022, and there’s More Pain to Come

Recessionary outlook and new tax burden triggers record SPAC liquidations in December.
Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

At just $157 million in gross public proceeds in 2022, special-purpose acquisition companies (SPACs) have brought in the lowest returns over eight years. Compared to 2021, there are seven times fewer SPAC launches this year. Will 2023 be the final nail in the blank-company coffin?

2022: The Big SPAC Wind Down

The last two years have been marked by a market boom and bust. This corresponds with the Fed’s $5 trillion liquidity boost in a near-zero interest rate environment, only to be reversed with rapid interest rate hikes up to 4.5% as of December. Just as the stock and crypto markets were recipients of that excess liquidity, so were SPACs. 

The sole purpose of these blank-check companies is to attract capital through an initial public offering (IPO) in order to acquire or merge with an existing private company. The combination of the FED’s stimulus intervention, SPAC’s simplicity, speed and investor access without going through traditional IPOs exploded SPAC popularity in 2020.

Image credit: SPAC Insider

In 2020, SPAC deals jumped to $83.3 billion, a +514% increase from 2019. By December 2022, SPAC proceeds reversed to the pre-Fed stimulus level, at $13.3 billion, just +2.26% higher than in 2019. As the year winds down, nearly $45 billion worth of SPACs will have been liquidated, according to SPAC Insider.

According to NYU professor Michael Ohlrogge, SPAC creators have lost $9 million on average on liquidations this year. These losses come mostly from shell company formation fees, including legal, accounting, underwriting, insurance, transfer agent, and listing fees.

Worst December Forecasts Early 2023

The SPAC reversal aligns with the December 2020 SPAC boom, when new SPACs were given two-year deadlines. Accordingly, most SPAC liquidations happened this Q4, bringing the total number of liquidations in 2022 to 129, worth nearly $45 billion. This is a +63% liquidation increase from 2021, with 101 SPAC deals completed this year and over 400 SPACs still searching for capital, worth around $100 billion.

In December, SPAC Research recorded $12.8 billion worth of 27 SPAC deals going under. In the world of crypto, stablecoin issuer Circle terminated the SPAC deal with Concord Acquisition Corp (CND) this month, worth $9 billion.

Overall, December marks a historic SPAC downturn, with about 70 SPAC deals being liquidated. This is the sharpest monthly decline in SPAC history. According to SPAC Research, blank-check company promoters lost over $600 million this month, totaling over $1.1 billion for the year.

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More SPAC Liquidations in 2023 on the Horizon

When the world’s largest asset manager, BlackRock, warns of deep recession and persistent inflation in 2023 outlook, investors tend to listen. Previously hired by the Federal Reserve to manage the stimulus outflows, BlackRock now warns of a steep -2% GDP fall next year. 

Image credit: BlackRock

SPAC Insider founder, Kristi Marvin, had already noted investor sentiment aligned with BlackRock’s forecast. When SPAC liquidation deadlines are casted for a vote, investors opted for early redemptions in 84% of the cases, for the months of September, October and November. 

“We’ve got extension votes adjourning, SPACs holding early liquidation votes, deals with completion votes but not yet closed and in limbo, liquidation announcements buried in previously filed 10-Qs, and the list goes on.”

Kristi Marvin, SPAC Insider founder

Aside from the hostile macro environment, there is also an additional burden imposed on SPAC capital. In the Inflation Reduction Act (IRA), signed this August, SPAC sponsors face a 1% exercise tax provision. This means they would have to pay tax on SPAC investment returns next year. 

The IRA’s new Stock Buyback Tax penalizes corporations for returning capital to shareholders. Applicable to the de-SPAC transition, the tax would apply to these redemptions beginning from December 31, 2022. In other words, this is another accelerant for early SPAC liquidation votes.

Due to macro headwinds, the S&P US SPAC index has fallen to -16.93% year-to-date returns, which follows a -20% decline in S&P 500 (SPX) index. With the Stock Buyback Tax and even harsher macro forecasts for 2023, SPACs will likely end up in a deeper liquidation hole next year.

Update (30th December 2022) – Updated to clarify that Bill Ackman’s SPAC attempted to acquire 10% of UMG before withdrawing its offer.

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