Header image

Blank expressions—SPAC IPOs still booming, but sponsors are rethinking their approach

SPACs have had a rough year so far, relatively speaking, but let’s not get ahead of ourselves—cash shells still reign supreme. According to Dealogic, they account for 80% of all IPOs on US exchanges in 2022.

Overall listing activity may be down, but that’s still a larger piece of the overall IPO pie than in 2021, when SPACs constituted 51% of new issuances in the US. It’s also the highest share of the market on record.

At the current rate, US exchanges are on track to welcome around 250 new SPACs this year, on par with 2020. SPACs are far from over.

Stemming the tide

Problems can arise when blank checks set the clock ticking and start chasing a deal. Towards the end of last year, cash redemptions surged as investors balked at deals, leaving many SPAC sponsors high and dry and devising backstops to get their mergers over the line.

In 2022, this change in market sentiment presented further challenges. It can take four to six months between when a SPAC announces a merger and when it brings the deal to shareholders for a vote. When stocks are climbing, that’s not an issue—the lag benefits investors who feel they are getting an attractive price on an asset that could be worth even more by the time the deal closes. But the reverse is also true.

Growth stocks began 2022 with a false start amid monetary tightening fears. Investors could see the market falling away from the date a deal was announced and ran for the exits. As a result, the redemption rate remains elevated at 83% in Q1.

At face value

Deal advisors say sponsors must price their merger agreements as well as their PIPE financings properly and be prepared to sacrifice more to ensure deals close without investors cashing out.

Valuations have been a major bone of contention, especially considering the embellished promises made by many SPAC sponsors, whose deal targets later fell well short of the lofty revenue projections they made to entice investors.

The Securities and Exchange Commission is bearing down on this practice and could bring some much-needed sobriety to valuations. The regulator is set to announce measures to strengthen investors’ ability to sue over inaccurate forecasts.

That’s a win for investors but also for the space at large. It will disincentivize sponsors to overpromise and help SPACs regain some of the credibility lost last year.