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June 2022
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Analysis: SPACs lose shine

SPAC
By Paul Mackintosh   
April 20, 2022

Remember SPACs? Those special purpose acquisition companies that you may have put money into to buy and list hot startups – if you were an exceptionally reckless, gullible or easily led investor. Of course, if you were the sponsor or lead manager, you’d be very pleased about all the money you got floating and listing SPACs.

In February 2020, Barron’s reported that “the structure is booming on Wall Street” with “a virtuous circle unfolding in the industry in recent years, with more credible SPAC sponsors doing deals with higher-quality companies, which attracts better, fundamentals-focused investors”. That year, some 250 SPACs raised more than US$83 billion.

And now? According to PitchBook research, there were almost no initial public offerings in the first quarter of this year, let alone SPAC-type listings. Given the performance of SPAC-invested entities since 2020, it really isn’t a surprise. Today’s market may be no friend to IPOs in general, but it’s brutally exposed the shortcomings of SPACs, and of fashion-driven yield-chasing in general.

Remember that one of the main attractions of SPACs – for the promoters at least – was that they required a much lower level of diligence than traditional IPOs, since there were no financial statements to study. If you invested into a SPAC prior to its acquisition of its target private company, you didn’t even know what the target was. Yes, the attraction was that you knew less about what you were investing in than with an old-style IPO. It’s not a bug. it’s a feature. And they’ve performed roughly how you’d expect in the circumstances.

PitchBook’s research includes a new benchmark, the deSPAC index, demonstrating how completed SPAC propositions have performed since execution, covering the period 2018 to March 15, 2022. From parity at the start of 2018, the SPAC vehicles declined 47.8% compared to a 59.4% gain for the S&P 500.

The S&P 500 has declined 10.6% since the start of 2022; the SPAC entities have fallen 35.6% in that period. Essentially, the deSPAC index tracks the S&P 500, but performs much worse.

Of course, there are always some caveats. Most SPAC deals on that index priced at the peaky valuations of 2020-21. A company reverse-listed through the SPAC structure actually has to do what it was bought to do. Market conditions have dramatically worsened in 2022. But those businesses haven’t shown much resilience on average versus the S&P.

Revisiting the whole structure and value proposition of the SPACs, it’s probably no surprise that they are where they are now. Pity the poor investors who didn’t get out of the SPACs at peak value – usually just after the reverse merger.

But no need to pity the investment bankers and sponsors who earned their fees by structuring SPACs. For an exhibition of senseless, irrational greed, the whole SPAC circus takes some beating. And as usual, the poor retail investors end up carrying the can.