{"id":33658,"date":"2022-06-02T15:23:17","date_gmt":"2022-06-02T15:23:17","guid":{"rendered":"https:\/\/harchi90.com\/why-spacs-are-flailing-as-market-conditions-shift\/"},"modified":"2022-06-02T15:23:17","modified_gmt":"2022-06-02T15:23:17","slug":"why-spacs-are-flailing-as-market-conditions-shift","status":"publish","type":"post","link":"https:\/\/harchi90.com\/why-spacs-are-flailing-as-market-conditions-shift\/","title":{"rendered":"Why SPACS Are Flailing as Market Conditions Shift"},"content":{"rendered":"
Matt Higgins, a former judge on the reality TV show \u201cShark Tank,\u201d is an experienced investor whose firm, RSE Ventures, helps young companies build their businesses.<\/p>\n
So it was no surprise that in November 2020, Mr. Higgins embraced one of Wall Street’s biggest recent obsessions by launching a SPAC. Special purpose acquisition companies – known by their acronym – are shell entities that sell shares to the public and use those funds to buy an operating business. Investors get their money back if the SPAC hasn’t found a business to buy within a two-year window.<\/p>\n
Last summer, Omnichannel Acquisition, the SPAC backed by Mr. Higgins, agreed to buy Kin Insurance, a fintech company. But in January, the two sides called off the deal, citing “unfavorable market conditions.” In May, Mr. Higgins decided he’d had enough. He is liquidating Omnichannel and returning the $ 206 million his SPAC raised to investors.<\/p>\n
\u201cWe did months and months of work to get Kin ready to go,\u201d Mr. Higgins said. “But the market completely turned on us.”<\/p>\n<\/div>\n<\/div>\n
Wall Street’s love affair with SPACs is sputtering.<\/p>\n
After two hot and heavy years, during which investors poured $ 250 billion into SPACs, rising inflation, interest rate increases and the threat of a recession are fomenting doubts. Increasingly, investors are withdrawing their money from SPACs, which they’re allowed to do at the time of the merger. With stocks of high-growth companies recently getting clobbered, they have been less willing to bet that SPAC mergers – which often involve risky companies – will be successful.<\/p>\n
At the same time, regulators are stepping up scrutiny of SPACs. The Securities and Exchange Commission has opened dozens of investigations into SPACs and is proposing tighter rules. Increased regulation would make SPAC deals less profitable for the big investment banks that arrange these transactions, because they would have to commit more resources to comply. They, too, have begun pulling back.<\/p>\n
\u201cYou could see this cliff coming,\u201d said Usha Rodrigues, a professor of corporate law at the University of Georgia School of Law who has emerged as a leading expert on SPACs.<\/p>\n
The wreckage is piling up.<\/p>\n<\/div>\n<\/div>\n
On Tuesday, Forbes Media became the latest company to scrap its planned merger with a SPAC. Around 600 SPACs that went public in the past couple of years are still trying to complete deals, according to data from Dealogic. Roughly half of them might not find targets before their two-year window closes. At least seven SPACs have folded since the beginning of the year. Another 73 SPACs that were waiting to go public have shelved their plans. A fund that tracks the performance of 400 SPACs is down 40 percent over the past year.<\/p>\n<\/div>\n<\/div>\n
Although SPACs had been around for decades, they long had an unsavory reputation. Only companies whose financials wouldn’t survive investor scrutiny en route to a traditional initial public offering used SPACs to go public. That changed at the beginning of 2020, when prominent financial firms, venture capitalists and hot start-ups embraced SPACs as a faster and easier route to the public markets than an IPO<\/p>\n
Wall Street banks were only too eager to arrange these cookie-cutter deals for hefty fees. And investors desperate for returns enthusiastically bought in.<\/p>\n
Suddenly, everyone from hedge fund managers like Bill Ackman to celebrities like Patrick Mahomes, the NFL quarterback, and Serena Williams, the tennis legend, jumped on the SPAC bandwagon. Retail investors got involved, too, as stock trading took off during the pandemic. Even former President Donald J. Trump struck a deal with a SPAC last year to take his fledgling social media company public.<\/p>\n
\u201cWhy did VCs turn to SPACs all of a sudden? Because reputable investment banks started underwriting them, \u201dsaid Mike Stegemoller, a finance professor at Baylor University.<\/p>\n
SPAC deals have been an important new source of revenue for Wall Street banks. Since the start of 2020, the top 10 banks arranging the public offerings of SPACs made just over $ 5.4 billion in fees, according to Dealogic. Citigroup, Credit Suisse and Goldman Sachs pocketed the biggest fees.<\/p>\n
Companies that sell shares to the public through an IPO have to undergo a rigorous process with strict rules. But SPACs face few regulations, since the companies going public have no actual operations yet. The shares are usually priced at $ 10 apiece.<\/p>\n
Early investors also get warrants, a type of security that gives them the right to buy additional shares later at a predetermined price. If shares of a SPAC go up after it finds a merger partner, warrants can be financially rewarding.<\/p>\n<\/div>\n<\/div>\n
The SPAC has two years to find an operating business to buy; otherwise, the money has to be returned to investors. Since investors don’t know what business a SPAC will end up buying, they have the option of redeeming their shares when they vote on the merger – meaning that the merged entity could end up with far less cash than the SPAC raised.<\/p>\n