The End of the SPAC Era

Special Purpose Acquisition Companies, once Wall Street’s hottest ticket, have become one of the most hated trades this year, as we covered in our SPAC Prognosis last month. SPACs have gone from making up an estimated 50% of the total U.S. IPO market in a record-setting first quarter of 2021 with 299 listings valued at $98.3BN to now 18 registrations this entire 2022 year and still in the process of raising $2BN. To add salt to the wound, the SEC has increased scrutiny of blank-check companies by threatening new rules in response to numerous complaints that, if implemented, can effectively put SPACs out of business.

SPACs have been around for decades, but they've experienced immense growth, moving from 1 in 2009 to 248 in 2020, driven by factors such as:

·  stock exchanges pushed to bring SPACs into the market due to a rapid decline of public companies over the last 20-30 years

·  the SEC started regulating SPACs, which boosted their reputation

·  we saw a huge increase in capital invested in private equity

·  a volatile pandemic-shaken market accelerated interest in this speedy and streamlined alternative to traditional IPOs.
 

So why did Silicon Valley’s hippest trend for start-ups to go public suddenly go downhill over the last year? According to Bloomberg Law, inflation, rising interest rates, the geopolitical conflict, and the removal of government pandemic support for the economy are all reasons, as the cumulative effect of these issues have have caused the worst beginning of a year for stocks in five decades. These factors have made it increasingly difficult for SPACs, which typically have two years to close a deal before returning money to their investors. The industry’s choppy performance has driven a wave of SPAC deals canceled by seasoned sponsors with 30 breakups so far this year, despite termination fees, sometimes in the millions, when a SPAC merger calls it quits.

CNBC reports, “the biggest laggards this year in the space include British online used car start-up Cazoo, mining company Core Scientific, and autonomous driving firm Aurora Innovation, which have all plunged more than 80% in 2022.” Seattle FinTech companies Porch, Rover, and Leafly, which went public via SPACs, have seen their stock prices drop by at least 50% from all-time highs, representing similar declines at numerous start-ups in the last year.

The latest SPAC era is ending in a long, agonizing finale.