SPACs are becoming less guaranteed as business gets stranger, stocks pile up

Things are getting weird in the sizzling SPAC market. A leisure SPAC is now making a biotechnology deal, while a blank marijuana check company eventually merged with a space company.

Sponsors are rushing to close their deals in an increasingly crowded space, while more than 370 American blank check companies with more than $ 118 billion in capital are trying to match, according to data from SPAC Research. Nearly 60 SPACs identified their merger targets in February alone, the biggest month of all time, the data say.

“They are going public with lower quality companies,” said Ross Mayfield, investment strategy analyst at Baird. “They are shocked by the ability of companies of reasonable quality, especially in popular niches.”

In the face of intense competition, deadline pressure and a volatile market, some SPACs had to settle for less ideal targets and, in some cases, throw their entire project out the window. And the rise in rising SPAC shares has started to roll over as shareholders struggle to bail out when business turns out to be disappointing.

The proprietary CNBC SPAC 50 index, which tracks the top 50 US pre-merger blank check trades by market cap, has fallen by more than 15% in the past two weeks, almost giving up all of its 2021 earnings. CNBC SPAC Post Deal Index, which is made up of the largest SPACs that hit the market and announced a target, fell by a similar amount and was negative for the year.

Last month, Leisure Acquisition Corp., a SPAC that initially targeted a leisure company as its name suggests, announced a $ 200 million deal with Ensysce Biosciences, a biopharmaceutical company that fights drug overdoses. Stable Road Acquisition Corp., a cannabis SPAC, has also made a major pivot and is closing a deal with space company Momentus.

Although one or two cases do not represent a trend, they raised concerns that the quality of SPACs could deteriorate in the future, only due to the large number of pending deals. SPACs also compete with private equity firms, many of which still have a lot of dry powder to deploy.

“There could be no agreement, or there could be an agreement with a company that does not necessarily guarantee that it is a public company,” said Sylvia Jablonski, investment director at Defiance ETFs, who launched the first SPAC ETF (SPAK) in September. “If time has passed and they have done nothing, there is a chance that they can make a bad merger to complete it, because now all that time, energy and investment has been invested in it.”

The SPAC trade, before it looked like it could only go up, may have started to crumble as more of the acquisitions chosen by SPAC failed. Speculative areas of the market also tend to be hit hard when volatility increases.

“The tip of the stick, which is the IPO space, will feel more pain when you have a change in risk than other areas of the market,” said Justin Lenarcic, Wells Fargo, senior alternative investment strategist.

SPACs represent special-purpose acquisition companies that raise capital in an initial public offering and use cash to merge with a private company and make it public, usually within two years. Excited investors have accumulated shares in these empty cooperation capsules in the hope that they will have a home run.

Some of the high-profile trades are being traded more than 40% above the IPO price, including Bill Ackman’s $ 4 billion Pershing Square Tontine Holdings and two Chamath Palihapitiya SPACs.

“Some people are a little complacent when they hear that SPACs are not risky because you have the ability to redeem your interest if you don’t like the deal … but you also need to realize that it only works if you invest early,” said Lenarcic. “It really depends on where you are investing in the SPAC lifecycle.”

Many retail investors buy SPACs in the secondary market, which means that they are likely to miss the initial pop in common shares, as well as the benefits associated with subscription bonuses. Meanwhile, investors who buy and hold, who only enter the business after the deal is closed, almost always lose money.

In terms of SPAC issuance, there are no signs of a slowdown. Funds raised in the first two months of 2021 already rival the record-setting capital of 2020 – $ 68.5 billion last year against $ 83.4 billion last year, according to SPAC Research.

“The fast pace of issuance is probably unsustainable,” said David Kostin, head of US equity strategy at Goldman Sachs, in a note. “SPACs can generate more than $ 700 billion in acquisition activities over the next two years.”

Some recent new issues are raising eyebrows on Wall Street. Last month, a SPAC called “Just Another Acquisition Corp.” was filed with the Securities and Exchange Commission to raise $ 60 million for a business in an unspecified industry. There is also “Do It Again Corp.” this week, a Delaware-based SPAC that could target restaurants and retail brands, according to a filing.

“There may be an increasing element of FOMO here,” said Lenarcic. “I think you need to be cautious. You certainly need to understand that not all SPACs are created equal, certainly not all sponsors are the same and not all businesses are going to work.”

– CNBC’s Gina Francolla contributed reporting.

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