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Busted flush: SPAC liquidations are on the rise

Earlier this month, the Omnichannel Acquisition SPAC finally called it a day after having pulled the plug on its merger with Chicago-based direct-to-consumer home insurance company Kin Insurance in January.

Shareholders were reimbursed the US$206 million that the SPAC raised in its November 2020 IPO, plus interest. That makes it the sixth SPAC to dissolve this year and the ninth since January 2020, according to Dealogic data.

Other US-listed SPACs to liquidate this year include Cascade Acquisition, Mallard Acquisition, Alberton Acquisition, CHP Merger and Burgundy Technology Acquisition.

Unimpressed Congress

There are 591 SPACs that have yet to complete a merger, and the likelihood of them capitulating is increasing by the day.

First, there is mounting political and regulatory opposition to these vehicles. US Senator Elizabeth Warren recently floated legislation that would require SPACs to increase the level of disclosures they make to investors, lengthen the lock-up period for sponsors, and widen the legal liability to which advisors and promoters are subject when shareholders are given overblown promises.

The Securities and Exchange Commission (SEC) is also proposing stricter rules for SPAC sponsors and advisors, which has led to Citi, Goldman Sachs, JP Morgan, Morgan Stanley, and other banks dialing back their SPAC work.

Add to this investor reluctance from the bearish effect of a slowing economy, decades-high inflation and a Federal Reserve that is determined to crush demand to bring down prices. On average, more than 81% of SPAC investors have redeemed their shares so far in 2022, according to Dealogic.

On second thought

Increasingly, businesses that planned to go public through SPAC mergers are terminating their deals. Business news publisher Forbes is the latest company to cancel a planned SPAC merger, joining ticket platform SeatGeek and more than 20 other businesses that have done the same.

Many companies that made it to stock exchanges are also struggling. At least 25 businesses that went public between 2020-21 have issued warnings that they could go bust within a year, the Wall Street Journal reported on May 27, citing data from research firm Audit Analytics.

That amounts to more than 10% of the businesses that merged with SPACs during that period—double the rate of companies to list via IPOs.

Until the Fed is forced to pivot and stock markets can catch a break, whenever that comes, SPACs will continue to be the ugly stepchild of asset allocation.

US-listed SPAC IPOs that have subsequently liquidated (2020 – 2022 YTD)