The two-year boom in special purpose acquisition companies turned to bust in 2022. Rising interest rates, a sharp stock market sell-off and heightened regulatory scrutiny doused cold water on Wall Street’s torrid love affair with Spacs. These blank-cheque listing vehicles raised just $16bn for the year to December 19. That compares with $250bn investors poured into them during 2020 and 2021.
The relationship is unlikely to regain its spark next year. Spacs are time-limited. They usually have two years to use their funds to make an acquisition before they have to return the money to investors — with interest. At the moment there are far too many Spacs chasing too few deals. Over 650 Spacs with a combined pool of $159bn of IPO capital are looking for a merger target, according to an estimate from the London Stock Exchange Group.
Spacs can request an extension. Some will. Many will opt to liquidate. Some 22 liquidations have already been announced in the first three quarters of 2022. Prominent investors — including Chamath Palihapitiya and Bill Ackman — are among those who have thrown in the towel. Spac tie-ups that were struck when the market was stronger are falling apart, with 51 mergers cancelled this year, says LSEG.
Investors are not missing much. Spacs were once touted as a way for the average investor to invest in hot, unlisted companies. In reality, most post-merger Spacs have performed poorly.
Companies that completed deals this year have tanked. They chalked up an average loss of about 49 per cent for the first nine months of the year, according to Spac Research. The S&P 500 index lost 25 per cent over the period.
For investors, having Spac sponsors return their money in full with a bit of interest on top may well be a blessing in disguise. Some may be inclined to redeem their money sooner to avoid being hit by new tax rules on share buybacks. Sponsors will be left holding the bag.
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