The once-hyperactive market for special purpose acquisition company deals is facing some headwinds, and what lies ahead for the future of SPACs is unclear, according to the PitchBook Analyst Note: Q1 2022 SPAC Update and Performance.
SPAC activity in the first quarter of 2022 reached its lowest point since early 2020. Aftermarket performance is also hurting amid a tumultuous market, PitchBook finds.
The basics
A SPAC, aka blank-check company, is a publicly traded company — usually with a two-year life span — created solely for the purpose of acquiring or merging with a privately held existing business to help it go public. SPACs raise money mostly from public-equity investors, helping to mitigate risk and abbreviate the IPO process for target companies.
SPACS frequently offer target companies preferable terms versus a traditional IPO. After a SPAC’s IPO, proceeds go into a trust account and the SPAC gets 18-24 months to complete a merger with the target company in a process often dubbed de-SPACing.
While SPACs have been around for decades, their popularity has surged in the U.S. in the last few years. 2021 saw a record 613 SPACs go public, crushing the previous record of 248 SPACs in 2020.
Key findings
PitchBook’s report, which tracks the performance of SPACs through a turbulent market, offers the following findings:
SPAC activity has slowed significantly.
• The negative shift in public market performance of de-SPACed businesses in the first quarter’s choppy market — coupled with the last two years’ elevated valuations in high-growth sectors, where the current cohort of SPACs have been concentrated — has precipitated a slowdown in SPAC activity.
• New SPAC issuance retreated in the first quarter of 2022 on both count and capital bases, with only 78 SPAC IPOs closing on $15 billion in proceeds. This marks the lowest quarter since the second quarter of 2020, which was the cusp of the SPAC renaissance.
• Average and median SPAC sizes have plunged. The median dropped in half to $100 million after surpassing $200 million in both 2020 and 2021.
SPACs have changed focus.
• SPACs have begun to shift focus toward younger businesses, as well as sectors such as technology and biotech, in response to the bulging inventory of private companies delaying IPOs.
PIPE deals are dwindling.
• Private investment in public equity deals, a mainstay of the 2021 de-SPAC transactions, have become harder to obtain.
• The proportion of SPAC combinations including PIPEs dipped to 50% of the 30 deals in the first quarter of 2022. This comes after the percentage climbed as high as 80% for the same types of deals completed in 2021.
• The size of PIPEs deals in Q1 2022 has witnessed a drop relative to 2021. Median PIPE size dropped almost in half to $100 million after hitting $192.5 million in 2021.
Aftermarket performance is suffering among SPAC combinations.
• A number of recent SPAC combinations have been beset by very high redemption rates at merger time, forcing them to seek a completely new investor base at a critical juncture.
• Companies that have undertaken their de-SPAC process, meaning successfully completed their mergers, have sharply underperformed the S&P 500.
• Relative to the S&P 500’s 59.4% gain since 2018 and 10.6% dip to date in 2022, PitchBook’s de-SPAC Index posted downticks of 47.8% and 35.6%, respectively.
What’s ahead for SPACs in 2022?
In short, macroeconomic headwinds for the SPAC market appear to be substantial, and the outlook is uncertain for both new listings and mergers. For a better understanding, check out PitchBook’s SPAC predictions through the end of the year:
• Over the next few quarters, SPAC activity will continue to be dulled, owing to the disrupted flow of fresh capital from institutional allocators, aka PIPE deals, exacerbated by the lackluster performance of SPACs.
• SPAC combinations are apt to continue to flow as markets adapt to current conditions and the backlog of SPACs rush to close a deal as their acquisition deadlines near.
• The number of SPAC liquidations will increase, as a significant portion of deal-less SPACs fail to complete a deal on time.
• The possible end of the bull market for growth assets will increase the number of SPACs that fail to find a target company.
