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SPAC targets are holding their own in deals

It turns out that target companies in SPAC deals are retaining more equity than ever before, while retail investors are seeing a smaller piece of the pie.

According to analysis by Dealogic, on average, target companies have kept nearly 69% of their businesses so far in 2021 compared with just 47% in 2016. The tide turned in favor of target companies last year when they retained close to 62% of their businesses, after years of keeping roughly half, give or take a few percentage points.

And the trend is widening as the year progresses. Target companies have kept hold of nearly 72% of their businesses so far in Q3, up from 67% in Q2, the analysis shows.

Inevitably this means there's less equity to go around in de-SPACs and so the number of shares that public investors are receiving in transactions is shrinking. So far this year, SPAC investors have received about 16% of the combined businesses on average, a steep fall on the 40% received in 2016. Last year, public investors could purchase nearly 21% of the combined businesses’ shares.

Squeeze until the PIPEs squeak

This isn't a problem per se, provided investors are getting what they pay for on a cost per share basis. In fact, it would be concerning if existing shareholders, including management and the board, cashed out completely in a de-SPAC. Investors want to see significant skin in the game to keep everyone's interests closely aligned.

What should raise concerns among the retail brigade, however, is institutional money backing away from these deals. And there are signs of that retreat so far this year.

When a SPAC secures a deal, it often needs to top up its cash holdings with an outside PIPE (private investment in public equity). This typically comes from sophisticated, regulated investors. If there's a sizable PIPE tranche, it's a fairly strong validation of the deal.

This quarter, PIPE investors and other financial sponsors comprised just under 12% of SPAC deals, down from 14% in Q2 and nearly 17% in Q1. That's in absolute terms. On a relative basis, the ratio of institutional money to SPAC money has also edged down.

This could reflect chillier sentiment since the Securities and Exchange Commission weighed in on SPAC warranties accounting in April, after which issuance slumped. But blank check IPOs have been making a comeback since then. When these cash shells finally happen upon deals to merge with, SPAC investors will want to see PIPE contributions coming back too.