SPAC Renaissance is Over as Acorns Ditches Plans Over ‘Market Conditions’
When cash is cheap, Special Purpose Acquisition Companies (SPAC) can be an effective way to launch a publicly-traded company. However, as a hawkish Federal Reserve plans to increase interest rates, what happens to SPACs when the cash pipeline winds down?
SPAC Cancellations Ramped Up in Q4 2021 and Q1 2022
The macroeconomic fallout from the Federal Reserve’s interest rate hike announcement continues to unfold. We have already seen a tight correlation between Bitcoin and Nasdaq 100 index, both dropping by -28% and -14% respectively through January. While being different investment classes, both fall into the risky, tech-oriented growth category.
Likewise, the largest retail trading platform, Robinhood (HOOD), went down by -21.7%. On the more entrenched side of the equity market, S&P 500, took a moderate -6.3% dive in January. However, the last five days showed signs of a 1.8% rally. The same cannot be said of SPACs – special purpose acquisition companies.
Set as blank check companies with the sole purpose of investing money in promising companies for them to go public, major SPAC deals have been canceled:
- Acorns, micro-savings and trading app, terminated its $2.2 billion with Pioneer Merger Corp. (PACX.O). The deal was supposed to materialize by the end of 2021. Now, Acorns will have to pay Pioneer $17.5 million cancellation fees as monthly installments until December 15, 2022. The stated reason was “market conditions”.
- BBQGuys, an e-commerce platform for homeowners, broke the $963 million SPAC deal with Velocity Acquisition Corp. (VELO). The stated reason was supply chain disruptions, affecting the company’s bottom line.
- ServiceMax, a cloud-based software platform, canceled a $1.4 billion SPAC deal with Pathfinder Acquisition Corp. (PFDR). However, the termination was mutual so no penalty fees will be paid.
In total, late 2021 and early 2022 saw 17 SPAC mergers canceled, worth about $37.2 billion. To put into perspective, only 7 SPAC deals were terminated in 2020, as the Fed’s money-printing machine ramped up to unprecedented levels. In fact, both 2020 and 2021 experienced a SPAC renaissance, increasing by 320% and 913% respectively, compared to 2019.
Such a drastic uptick mirrors the Fed’s equally drastic actions, which increased its balance sheet from $4.1 trillion in December 2019 to $8.7 trillion in December 2021.
Now that Jerome Powell, the Fed Chair, wants a more hawkish monetary policy to douse the economic and political flames of record-high inflation, it looks like SPAC levels will return to pre-2020 levels.
However, there might be other contributing factors to SPAC abandonment too.
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SEC Targeted SPAC’s Pros
The expected downturn of FinTech and other tech-heavy growth assets due to Fed’s tapering is not the only reason SPAC mergers are declining. In our previous coverage of SPACs pros and cons, we noted that SPACs tend to achieve higher valuation as the public trading date inches closer. Likewise, SPAC IPOs (Initial Public Offerings) are significantly shorter than traditional IPOs.
Alongside fewer regulatory hurdles, SPAC deals also open up larger space for negotiating valuation. This faster and more secure cash inflow is one of SPAC’s key features. However, the SEC tampered with this mechanism last September. According to a Reuters insider report, the SEC pressured SPAC executives to treat redeemable shares as temporary.
This marked discontinuation of a long-standing SPAC practice to treat such shares as permanent equity. In turn, this shift in accounting led to many SPACs falling under the minimum equity capital needed for the Nasdaq Capital Market listing. For this reason, they were pushed to Nasdaq Global Market instead, which has no such equity requirements.
Lastly, another reason for the expected SPAC decline is that the data is in on SPAC IPO performance. Although SPACs made up 68.5% of all IPOs during Q1 2021, most have yielded poor returns. According to Goldman Sachs Global Investment Research, the data is clear:
“Since its February peak, an ETF of SPACs across stages of the lifecycle (ticker: SPAK) has returned -35%, vs. +14% for the S&P 500,”
With the interest rate now set to be increased multiple times during 2022, it is no wonder that SPAC deals are getting canceled left, right and center.
Do you think the Fed will go through with its rate hikes, or back down prematurely? Let us know in the comments below.