Date: May 12, 2023
A relatively new type of investment vehicle known as a Special Purpose Acquisition Company, or a SPAC made its appearance in the local stock market in January last year. Three SPACs were listed at the time to much fanfare but since then, there have been no further developments.
So, for now, it’s all quiet on the SPAC front, which then begs these questions: what will happen to these SPACs and what does the future hold for this novel type of capital raising?
These are valid questions but answering them isn’t straightforward. According to latest reports, the wind may have gone out of the sails of SPACs, which if correct, suggests that Singapore may have been too late getting into the game.
SPACs – a reminder
Before going further, it’s worth reminding ourselves on what SPACs are and how they are supposed to function. Commonly known as “blank cheque’’ companies, SPACs are listed shells that collect money from the public before having a core business and then are given 2-3 years to find a business to buy with the money previously raised.
Investors are essentially banking on the people behind a SPAC, who are known as Sponsors, to be able to identify good prospects to purchase in the time allotted. If such an acquisition occurs, the merger is known as “de-SPACing’’, the new business is injected into the SPAC and hopefully, it then goes on to reward the investors with superior share price performance.
Going the SPAC route is said to speed up the listing process for target companies which could take several months or even years. This time saved is usually cited as the main advantage that SPACs offer.
Since investors don’t know what business a SPAC will end up buying, they have the option of redeeming their shares when they vote on the de-SPACing, which means that the merged entity could end up with far less cash than the SPAC raised.
The year 2021 was good for SPACs, but performance is not guaranteed
According to an article published on Nasdaq’s website in January 2022, the year 2021 saw a significant increase in the popularity of SPACs with 613 listings that raised a total of US$145 billion – an increase of 91% from the amount raised in 2020.
However, the article also highlighted the performance of SPACs that successfully completed an acquisition from 2019 through early November 2021.
“Average returns are positive, gaining over 40%. However, the data suggests a lot of the positive return comes at the end of the pre-announcement period and at the end of the first year as an operating company. Average returns are also boosted by a few strong outperformers. The median return is closer to flat, even post-completion’’.
In other words, performance after de-SPACing is highly dependent on how much the market likes the target acquisitions. Perhaps more important is that “50% of SPACs drift down to record losses versus their common share first trade price, mostly after they complete their business combinations’’.
The year 2022 was not so good
In a June 2022 article titled “SPACs were all the rage. Now, not so much’’ the New York Times reported that after two years during which investors poured US$250 billion into SPACs, rising inflation, interest rate increases, and the threat of a recession are all having a negative impact.
“Increasingly, investors are withdrawing their money from SPACs, which they’re allowed to do at the time of the merger. With stocks of high-growth companies recently getting clobbered, they have been less willing to bet that SPAC mergers — which often involve risky companies — will be successful’’.
Furthermore, around 600 SPACs that went public in the past couple of years are still trying to complete deals, according to the NYT report.
“Roughly half of them might not find targets before their two-year window closes. At least seven SPACs have folded since the beginning of the year. Another 73 SPACs that were waiting to go public have shelved their plans. A fund that tracks the performance of 400 SPACs is down 40 percent over the past year’’.
Similarly, Valuation Research Corporation (VRC) in a report “SPAC Market Update: Who turned on the lights?’’ said whilst the process of merging has become more precarious, the SPACs that do close deals or “de-SPAC” have materially underperformed expectations and projections as a merged company, with de-SPAC stock performance suffering as a consequence.
“Most SPACs are trading materially lower from all-time highs, and the majority are trading at or near their de-SPAC prices’’ reported VRC.
Increased regulatory oversight is one reason
Part of the reason is that regulators have been stepping up their scrutiny of SPACs and tighter rules mean higher compliance costs which in turn mean narrower profit margins for the investment banks that arrange SPAC IPOs.
For instance, the US Securities and Exchange Commission (SEC) has expanded its oversight, launched hundreds of investigations into SPACs, some for fraud, and proposed stricter regulations to safeguard investors because of several high-profile SPACs falling short of expectations.
As a result, in 2022 the SEC issued new regulations for that placed limitations on the ability of Sponsors to sell shares of their companies as well as other measures meant to prevent fraud. The ability of the Sponsors to raise money from investors was hampered by these regulations.
The other reason is…
The other, perhaps main reason is obvious: SPACs aim to find promising high-growth companies, possibly tech disruptors that will capture the market’s imagination once listed. This sounds great in theory but investors should ask themselves how many of such companies are out there, waiting to be discovered?
Despite the setbacks, there is still hope for the future
Notwithstanding the negativity surrounding SPACs now, consulting firm EY in a report in October 2022 titled “SPACs: is the party over?’’ offered some words of encouragement by saying it may be that the worst is over.
“In recent months, it has been witnessed that stakeholders and sponsors started to act more cautiously and adjusting quickly to new realities. As a result of enhanced disclosures, improved due diligence, and the selection of ready targets, the SPAC industry should be able to outlast the current economic challenges and legal headwinds to emerge stronger and more resilient’’.
Some observers also believe that increased regulatory oversight in the US could push SPACs to seek listings elsewhere, which could benefit the Singapore market.