SPACs: Raise, Rest, Raise, Compete

The SPAC boom is spluttering, but market dynamics point to a recovery and increased transactions between SPACs and PEVC

If 2020 was the year of the special purpose acquisition company (SPAC), there are no superlatives to describe the first quarter of 2021. The Q1 total of $88bn raised by 320 blank-check companies eclipsed the $76bn raised in the whole of 2020, according to Standard & Poor’s. The brakes were slammed in April, with just 10 IPOs raising gross proceeds of $17bn in April and May, according to calculations based on SPACinsider data.

The trigger was an SEC statement on reporting and accounting for SPAC warrants on 12 April. Legal and financial advisory firm Appleby Global Services said the SEC’s suggestions were, broadly speaking, procedural and would be easy to implement, but it was enough to spook investors. An additional brake came from the disintegration of hedge fund Archegos, which caused multibillion losses at banks and has led to reduced lending to hedge funds, according to Bloomberg. Hedge funds had been big investors in SPACs but were reliant on leverage to juice the returns.

So, has the SPAC party come to an end? S&P titled its latest SPAC commentary “RIP SPACs,” though it did concede the title was “a bit facetious.” As Preqin reported in early April, the SPAC money is in the bank and ready to be spent. While many SPAC investments have focused on companies with transformative technologies and the potential to change the world, a slowdown and note of caution may lead to restraint and less ambitious investments. Private equity & venture capital (PEVC)-owned companies will make suitable targets. Among PEVC fund managers surveyed by Preqin in November, 26% said SPACs were a viable exit route. It is hard to see how the next two years – the investment period for SPACs – will not see greater transaction activity between PEVC and blank-check vehicles.

It may also be premature to write off SPACs. Appleby argues that investment dynamics are behind the current slowdown, with demand down because investors are fully committed and waiting for capital to be recycled (deSPACing). It predicts a flight to quality sponsors, looser warrant terms, smaller capital raises, forward purchasing agreements, and increasing demand from Asia, where the combination of difficult exit markets for venture investments and investor appetite will drive transactions, such as the $40bn deal for Grab. SPACs may be down, but they are unlikely to be out.