This time last year, special purpose acquisition companies (SPACs) were all the rage.
According to a December Forbes piece from Kellogg School of Management professor and private equity expert Phillip Braun, 613 SPACs were listed in 2021 at an average value of $265 million, pulling in total gross proceeds of $162 billion.
That marked a significant jump on 2020, which saw the listing of 248 SPACs, garnering total proceeds of $83bn.
Much of 2021’s SPACs surge played out in the first half of the year – a concentrated burst of activity that took on a swift momentum amid a surfeit of hype from the financial media.
A great deal of that hype focused on how SPACs provide startups and emerging corporates with an alternative route to going public to traditional IPOs.
Under a SPAC arrangement, a shell company will form, capitalise and list with the intention of acquiring a private business. Up to the point of purchase, the SPAC will nurture the target firm over a set incubation period, typically of around two years – steadily preparing it for life as a public entity.
This model has proved a particularly useful avenue for younger firms that are eager to boost their financial reserves and get themselves in shape for developing or releasing key products and services. As such, the SPACs market has derived significant energy from the thriving global startups scene.
However, if we fast-forward to the present, it’s clear that much of the energy that fuelled last year’s spike has already dissipated.
A roll-call of financial news outlets has issued a series of grim assessments of what can only be interpreted as a collapse in the market.
On 2 February, CNBC cited “abysmal losses [and] abandoned deals” as the defining hallmarks of the trading climate that ushered SPACs into 2022 – with Wolfe Research senior equity research analyst Chris Senyek warning: “The bubble is bursting … SPAC shares are extremely volatile due to their speculative nature.”
Less than two weeks later, Bloomberg confirmed that six SPAC deals had run aground in the weeks between the beginning of the year and 14 February – a record number of failures within a single quarter, with a total of 22 deals having fallen apart since the middle of 2021. To highlight how concerning that figure is, Bloomberg pointed out that 26 deals had been cancelled in the previous five years of market activity.
In a 25 February report, The Wall Street Journal noted that half of SPAC startups with revenues of less than $10m had failed to meet their financial targets for 2021 – casting doubt on the long-term viability of the firms that SPACs are aiming to buy.
Worryingly, the WSJ’s piece chimed with a Yahoo! Finance story from earlier that month, in which renowned short-seller Carson Block of Muddy Waters Capital said: “You can't look at it and say every company that’s gone public via SPAC is uninvestable. But if you’re going to look at probabilities, the probabilities are much higher that something that went public via SPAC versus IPO should be deemed uninvestable.”
Understandably, businesses at the heart of cancelled SPAC ventures have stopped short of providing behind-the-scenes details for public consumption.
In a 4 February announcement, innovative Californian medical firm HeartFlow cited only “unfavourable market conditions” as the reason behind the termination of its tie-up with prospective SPAC partner Longview Acquisition Corporation II.
On 1 March, 3D printing specialist Essentium struck a similar note in a statement revealing that its business combination agreement with Atlantic Coastal Acquisition Corp would not be going ahead.
Essentium chief executive Blake Teipel said: “We appreciate the Atlantic Coastal team’s support and guidance throughout this process, and we are disappointed that market conditions prevented the parties from consummating this agreement.”
However, in its coverage of the statement, the 3D Printing Media Network provided an interesting window on the terms the companies had arrived at before walking away from each other.
“Atlantic Coastal will be granted the right to receive payments in the future,” the piece noted, “subject to certain circumstances relating to the consummation of future financing transactions by Essentium, a sale of Essentium, or Atlantic Coastal’s inability to consummate a business combination transaction.”
As such, the article showed that even deal terminations in the SPAC arena can come with strings attached.
For insights on the various factors behind the SPAC market’s change of fortunes, The Treasurer spoke to Naresh Aggarwal, associate director, policy and technical, at the Association of Corporate Treasurers (ACT).
“With any dip of enthusiasm around specific methodologies,” he says, “we’re essentially looking at rising and falling waves in the context of different, fashionable endeavours. We’ve seen this pattern before with something like initial coin offerings, which built up significant interest a few years ago.”
Aggarwal points out: “The concept of launching a shell company to raise capital or gain a listing is not, in and of itself, new. But what we have seen over the past couple of years is that this approach has really taken off. The weight of money that the SPACs have attracted is extraordinary – and that’s clearly a reflection of the fact that there has been a large amount of money looking for something to do.
“So, enshrining that money in an array of SPACs is just one way of getting to the ultimate outcome, which is to support M&A activity.”
Aggarwal notes: “Perhaps the biggest factor behind what we’re seeing now is that there are good SPACs and bad SPACs – and, after the saturation we witnessed last year, the market is becoming steadily more adept at discerning between what makes for a good one and what makes for a bad one.
“In practical terms, that means we’re going to see more of a mixture of successes and failures – and that discernment will become even more refined. As the market matures, participants will no longer see SPACs as just an easy or convenient model – but something that has to be the right fit for the right business, at the right cycle of its development.”
Further, crucial macro factors stem from changing trends around interest: “We entered this year on a note of interest rates going up,” Aggarwal says. “That broadens corporates’ options for how they can deploy the collective wall of cash that, a year ago, they’d dedicated to SPACs.”
He explains: “Last year, we were talking about interest rate rises in terms of 25, perhaps 30 basis points. But if we think about where we are now, with the UK rate potentially rising 1.25% to 1.5% on where it is today, that in nominal terms is quite a big increase. And it will no doubt encourage treasurers and business leaders to think about how the strategies they’re forming today should differ from those they had this time last year.”
Turning to the practical points that treasurers and/or finance chiefs should consider before their business enters a SPAC arrangement, Aggarwal notes: “There will certainly be a series of governance and compliance requirements that firms would have to adhere to. Non-financial reporting – such as ESG – would probably kick in, and you will have to make the necessary provisions.”
Further to that, he stresses: “Carrying out due diligence on your prospective SPAC partner(s) is clearly an important and useful step. And once you are into that Know Your Customer space, you will also need to consider how the arrangement would affect your relationships with your banks, clients and suppliers.”
Aggarwal adds: “The most critical question to ask – and answer – is why you would want to take the SPAC path in the first place. Perhaps if you are a young company, it’s a great way to harness capital and build a growth story around your business model. But it has to be sustainable – it’s not a panacea that will work for every organisation.”
Matt Packer is a freelance business, finance and leadership journalist
