These are the Trends that will Define SPACs in 2022
The Rundown - Your weekly SPAC Deep Dive (01/09/22)
Happy Sunday Folks!
Just a Year Ago, SPACs seemed like they were unstoppable, with a record number of IPOs and business combinations being announced. Since then, however, SPACs have been on a rollercoaster, with regulatory challenges, lower Private Investment in Public Equity (PIPE) to support deals & a weaker appetite from retail investors after an initial wave of investment. Despite all these challenges, SPACs are relatively young and will continue to dynamically adapt to the continuously evolve based on market & regulatory dynamics. Today we discuss the biggest trends that could define SPACs performance in 2022.
Pressure to Get Deals Done QuicklyÂ
New SPAC IPOs surged last year, with over 613 blank-cheque companies joining the 248 firms that debuted in 2020. As a result, there are now over 1000 SPACs that are currently looking for a deal.
Despite the enthusiasm by sponsors to find deals, there is a large discrepancy between the shrinking pool of target companies on offer, and the vast sea of SPACs looking to take them public. With just 267 deals announced in 2021, a majority of the SPACs that launched last year may resort to riskier deals, paying a premium on valuations or looking at international targets as alternatives.
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Extensions/Liquidations Set to IncreaseÂ
The latter half of last year set the pace for the duration of deals, with an average timeframe of 9-months from the time of the announcement of the deal to public listing. Given that SPACs generally have a timeframe of between 18-24 months to close out a deal, many SPACs that debuted in the last two years will be pressured to file for an extension/liquidation.
Over the near term, SPACs may press on for extensions (SPACs are generally allowed two extensions), but the future for most dealmakers seems quite bleak, and mass liquidations may be on the horizon. There was just one SPAC liquidation in 2021, compared to two in 2020 and five in 2019. Liquidations are expected to sharply go up in 2022, given that there is a shortage of both high-quality targets and capital to anchor the deal.
Rise of International DealsÂ
A majority of the SPAC transactions in 2022 are expected to constitute target firms located primarily in international markets across Latin America, Africa & Asia. There are two key reasons that US SPACs will focus on international markets, rather than at home. The average capital raised by a US SPAC in 2021 was approximately $300 million (later SPAC IPOs also have backstop provisions & better capitalized), indicating that SPACs are still flush with liquidity, and are eagerly scouting deals.
With SPACs witnessing a saturation in deals/lower quality targets at home, they may have to shift their focus towards international markets. For Target Companies in Emerging Markets, SPACs are still the way to go as they provide access to liquidity & capital markets in the shortest time frame (as opposed to a drawn out IPO). Recent deals such as Codere, Grab and Swvl have set the pace for this year, with some of the biggest rumored deals including Byju’s, Carousell, and Caliente all looking to make a dent this year.
SEC vs SPACsÂ
Securities and Exchange Commission (SEC) Chief Gary Gensler hasn’t held back his opinion about the inherent flaws of SPACs, often terming them inferior to IPOs. The SEC cracked down twice on SPACs in 2021, once in April regarding accounting guidance for equity warrants, and again in September to reclassify redeemable shares as mezzanine equity.
The ensuing chaos from the new guidance resulted in deals coming to a halt, restatements in financials, and investor & sponsor confidence in SPACs falling dramatically. Dealmakers have worked with the regulations, and deal flow has gradually improved since, but Gensler has vowed for tougher restrictions, which may slow down activity yet again.
Gensler wants to ensure that directors, sponsors & advisors provide better financial disclosures (some early SPAC deals were prone to inflated future projections), but additional regulations may be incoming (especially with pressure looming in from congress).
In addition to tightening up regulations & slowing down deals in general, the SEC has also gone after SPACs themselves and is investigating companies like Digital World Acquisition Corp (The SPAC set to Take Trump’s Social Media Company Public), Lucid Motors, and Workhorse Group. While additional regulations from the SEC should help improve the quality of deals over the long term, it may risk sacrificing what made SPACs unique in the first place.
Better Deal Structures will Lead to Lower Redemptions
While SPACs saw a boom in February 2021, average De-SPAC performance began deteriorating as the year went on, leading to a reluctance from investors to commit to deals. In the first quarter, only 12.5% of all deals witnessed redemptions of greater than 50% but by Q4, over 65% of all SPAC transactions experienced redemption levels of above 50%. SPAC activity is expected to cool off this year, with fewer higher-quality deals taking place. This coupled with the improved capital structure of SPAC transactions since last quarter, is expected to result in significantly lower redemptions moving forward.
Fewer, High-Quality DealsÂ
At its peak last year, SPACs attracted massive amounts of capital and capital from investors hoping to get in early on the next Apple/Tesla. As the months proceeded, however, SPACs were marred with issues, including tougher regulations by the SEC, Higher Redemptions & Lower Appetite for Deals in general.
With over 1,000 SPACs currently looking for deals, it’s becoming abundantly clear that not all SPACs are created equally, and that the whole industry, in general, is set for consolidation. Moving forward, SPACs could mirror the Venture Capital & Private Equity markets, where plenty of competition exists in the fringes, but the best deals could arise from a select few high-quality sponsors (including Serial Sponsors like Social Capital, Churchill Capital, Gores Holdings, and dMY Technology Group).