Traders work on the floor of the New York Stock Exchange (NYSE) in New York, USA, on January 31, 2018.
Brendan McDermid | Reuters
Things are getting weird in the sweltering SPAC market. A recreational SPAC is now doing a biotech deal, while a cannabis check company is finally merging with a space company.
Sponsors are rushing to get their transactions in an increasingly tight spot, as more than 370 U.S. blank check companies with more than $ 118 billion in capital want to fight, according to data from SPAC Research. Nearly 60 SPACs identified their merger targets in February alone, the largest month ever, according to the data.
“They bring companies from lower and lower quality audiences,” said Ross Mayfield, Baird’s investor strategy analyst. “They come up against the ability of businesses of reasonable quality, especially in the popular niches.”
Faced with intense competition, deadline pressure and a volatile market, some SPACs had to be content with less than ideal targets, and in some cases throw their entire blueprint out the window. And the rise in red-hot SPAC shares has begun to roll over as shareholders try to redeem when transactions turn out to be disappointing.
The own CNBC SPAC 50 index, which tracks the 50 largest US-based empty check transactions by market capitalization, has fallen more than 15% over the past two weeks, giving up almost all of its 2021 gains. The CNBC SPAC Post Deal Index, which consists of the largest SPACs to hit the market and announce a target, caused a similar amount to tumble and become negative for the year.
Last month, Leisure Acquisition Corp., a SPAC, initially focused on a leisure business, as its name suggests, announced a $ 200 million deal with Ensysce Biosciences, a biopharmaceutical company that overdoses on drugs. Stable Road Acquisition Corp., a cannabis SPAC, has also made a major pivot and concludes an agreement with space company Momentus.
Although one or two cases do not have a trend, it has expressed concern that the quality of the SPACs may deteriorate going forward, simply because the outstanding number of offers is available. SPACs also compete with private equity firms, many of which still have very dry powder to put in place.
“There can be no agreement, or there can be an agreement with a company that is not necessarily a public company,” said Sylvia Jablonski, chief investment officer of Defiance ETFs, which launched the first SPAC-ETF (SPAK) ever. said. September. “If time has passed and they have not done one yet, there is a chance that they can just do a bad merger to complete it, because there is energy and investment involved all this time now.”
SPAC shares rolling
The SPAC trade, which once seemed like it could just go up, may have started to go undone as more of the SPAC’s chosen takeovers flop. The speculative parts of the market also tend to get heavy as volatility increases.
“The sharp point of the stick, which is the IPO space, will feel more pain if you take a risk move than other parts of the market,” says Justin Lenarcic, Wells Fargo, senior alternative investment strategist.
SPACs stand for special purpose fundraising companies, which raise capital in an initial public offering and use the cash to merge with a private company and make it public, usually within two years. Excited investors are piling in shares of these empty corporate shells in hopes of fetching a home-based business.
Some of the high-profile deals are trading more than 40% above their IPO price, including Bill Ackman’s $ 4 billion Pershing Square Tontine Holdings and two of Chamath Palihapitiya’s SPACs.
‘Some people get a little complacent when they hear that SPACs are risk-free because you have the ability to redeem your interest if you do not like the transaction … but you also need to realize that it only works if you invest early, ‘Lenarcic said. “It really depends on where you invest in the life cycle of the SPAC.”
Many retail investors buy SPACs in the secondary market, which means they are likely to miss out on the early shares in common stock, as well as the benefits of warrants. Meanwhile, they are losing buy-and-hold investors who only switch in after an agreement has been reached.
‘Unsustainable’
As far as SPAC issuance is concerned, there are no signs of slowing down. The funds raised in the first two months of 2021 are already competing with the capital from a record year of 2020 – $ 68.5 billion years so far, compared to $ 83.4 billion last year, according to SPAC Research.
“The rapid pace of issuance is likely to be unsustainable,” David Kostin, Goldman Sachs’ head of U.S. equities strategy, said in a note. “SPACs could generate more than $ 700 billion in procurement activity over the next two years.”
Some recent new releases are raising eyebrows on Wall Street. Last month, a SPAC called “Just Another Acquisition Corp.” was filed with the Securities and Exchange Commission to raise $ 60 million for a transaction in an unspecified sector. There’s also ‘Do It Again Corp.’ this week, a Delaware-based SPAC is targeting restaurants and brands.
“There could be a growing element of FOMO here,” Lenarcic said. ‘I do think you need to be careful. You should definitely understand that not all SPACs are equal, certainly not all sponsors are equal and that not all offers are going to practice. ‘
– CNBC’s Gina Francolla reported.
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