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SPAC dishes not quite as PIPEing hot these days

Pity the SPAC sponsor. In recent weeks, investors have been pulling their money out of SPAC trusts, balking at the mergers these vehicles have settled upon.

If those redemptions aren't too high, this shouldn't be an issue. Private placements in public equity (PIPEs) that come from institutional corners provide a capital stopgap, while also validating a deal and its valuation. But when the PIPEs stop flowing, you know you have a problem.

According to Dealogic, there were only a few PIPE deals filed in October, collectively adding up to a measly US$348 million, after just five deals totaling less than US$660 million were recorded in September. This makes October the weakest month for PIPEs so far this year.

An abundance of caution

Blame the oversaturated SPAC market for the evaporation of PIPEs. Earlier this year, the SPAC IPO and PIPE markets were flooded with deals going out to the same groups of investors at the same time.

An intervention by the Securities and Exchange Commission over how these vehicles account for their liabilities put the brakes on activity. But the reality is that potential buyers of these deals have been spoiled for choice. And like the SPAC retail money that has been fleeing, so too has the PIPE institutional money been having second thoughts about these mergers. It's a case of too much hype and too few quality assets on offer.

By May, shortly after the frenzy peaked in February, the average PIPE size fell to US$178 million, less than half the size seen the month before and, at the time, the weakest month of the year.

Notwithstanding a momentary lift in August owing to the bumper merger of Aldel Financial and classic car insurer Hagerty, it's been downhill ever since. September’s average PIPE size fell to US$165 million. In October it was US$109 million.

Backstop at nothing

SPAC sponsors have had little choice but to get creative. In lieu of the PIPEs they depend on to push deals over the finish line, backstops such as convertible bonds are being used to meet merger valuations.

These alternative financing solutions are replacing the exodus of investors exercising their redemption rights and the retrenchment of PIPEs.

However, even with this mass PIPE pullback, 2021 has been a year to remember. More than US$45 billion has been raised in PIPE financing this year, 3.6x 2020's figure and 36x 2019's total. But there’s no denying it—the year that started with a bang looks to be ending with a whimper.