A year ago they were a fashionable product, protagonist of the stock market chronicle, which attracted investors and celebrities from worlds outside the financial sector. The SPACs were the last thing on the stock market and dozens of operations moved billions of euros. Now, however, its moment has changed: several investors have canceled listings, while those that did get listed suffer significant losses in value. Interest rate hikes, regulators' concern or a disappointing market record are behind the cooling off of these investment formulas.
The Government promotes SPACs as an "alternative to dependence on bank credit" for companies
SPACs, also known as blank check companies, are investment vehicles that go public with the aim of acquiring other companies. That is to say, they are firms that when they debut in the market do not have a real activity. When the acquisition takes place, the purchased company becomes listed in the position occupied by the SPAC. In this way, it has been a faster way —and with fewer controls— to start listing for these companies.
It is an eminently American phenomenon, although in Europe there has also been some movement. Not in Spain where it has not finished germinating till the date. Last year was a particularly intense exercise in this field. According to different reports, the number of SPAC IPOs exceeded 600 and moved more than 140,000 million dollars. The SPACs were the great drivers of the stock market debuts that took place in the US, until this year. Although the slowdown had been appreciating since the end of 2021.
There are many reports from investment banks and analysis houses that have been published on this process. For sample, two buttons. The first is a document from Renaissance Capital, an IPO advisory and research platform, which recently noted that of the nearly 200 companies that went public last year after merging with a SPAC, only 11% of them currently have a higher value. On average, these companies have depreciated by 43%. This report indicates that IPOs through a SPAC have had worse results than traditional stock market debuts.
The other sample button is a document from PitchBook, a data platform on stock trading from the multinational company Morningstar. This report put into figures the brake that the SPACs are having during the start of the year. In the first quarter, 78 companies of this type have debuted, raising some 15,000 million dollars. It is the worst quarter since the pandemic began. In addition, the document warns that the average size of these operations has decreased, from about 200 million to about half. Added to this is the fact that if compared to the evolution of the price of the US stock market as a whole, companies that are listed after merging with a SPAC have 10% less profitability.
These reports and others advance some of the causes behind this brake. On the one hand, the fact that the bad record of the companies that have merged with SPAC is due to the fact that in many cases they were operations that were carried out at very high prices. On the other hand, some of the merged companies, many of them recently created, have not achieved the objectives that were set. One of these cases has been that of Virgin Galactic, Richard Branson's space tourism company, which went public in 2019 through a SPAC. Revenue of 210 million was projected for 2021, but it obtained just over 3 million. Or that of AppHarvest, an agricultural technology company backed by Martha Stewart, anticipated 25 million turnover and obtained 9 million.
These situations have raised the skepticism of investors towards these vehicles, cooling the euphoria that was experienced just a year ago. Also from the supervisors. The SEC, a US body similar to the Spanish CNMV, announced a few weeks ago its intention to tighten the requirements for these investment vehicles. This supervisor intends to provide "greater protection" to the investor. To do this, it plans to force increased information on the drivers of these SPACs, also on possible conflicts of interest. In addition, these new regulations, which are in the public hearing phase, would oblige the companies acquired by the SPACs to align the information provided about their business and their accounts with that provided by companies that go public in the traditional manner. . This was one of the criticisms that these investment vehicles have received, by allowing the listing of companies with fewer requirements than those of any other company, which may allow fraud or risks for investors.
Pitchbook adds other causes that have curbed the rage for these vehicles. Low interest rates had flooded the markets with liquidity and had favored these phenomena. To the extent that rates rise in response to inflation, the capital available to invest in SPACs is curbed. Added to this is the uncertainty that exists due to the geopolitical context opened by Russia's invasion of Ukraine.
In this context, there are already numerous cases of SPACs that had everything ready to go public and look for an acquisition that have decided to delay or rule out the operation. For example, the billionaire banker Ken Moelis, once one of the most influential on Wall Street, recently ruled out the IPO of two SPACs that were expected to add more than 1,000 million. Last week another entity, Queen's Gambit Growth, which aspired to reach 300 million, also backed down and put aside the idea of listing. Another firm was also going to be listed for that same value, backed by a Chinese venture capital fund, Hony Capital, which also announced the brake on the operation. This same week, the one who was a partner of Zuckerberg in the birth of Facebook, Eduardo Saverin, also canceled his plans to launch a SPAC that would attract 200 million. This continuous trickle of cases has been taking place since the end of last year.
Broadly speaking, a SPAC works with sponsors, who are the promoters and usually have famous names such as athletes (Tom Brady, Shaquille O'Neal or Naomi Osaka) or musicians (Jay Z). These, who present themselves as knowledgeable about a field in which the acquisitions are going to focus, attract investors who finance this company, while ensuring a commission in the form of participation in the future company. However, the regulations allow those who have contributed capital to leave if the decided acquisition or the strategy of the SPAC is not shared. As reported by the Financial Timesin March there were more than 80% refunds to shareholders and the previous month these levels had been significantly exceeded, which has provided greater uncertainty about the future of these vehicles.
The aforementioned Pitchbook report ensures that an increase in cases of SPAC liquidations that do not reach any purchase in the committed period and that have to end up returning the capital to investors is expected for the coming months. One of the reasons is that the strong growth in the number of companies of this type has far exceeded the companies that could be targeted for purchase, which has caused a distortion in the market. "This situation is only going to accelerate the number of SPACs that do not meet their objective," the document concludes.