As SPACs Slow, Terms Change And The Market Widens For Targets

While the SPAC craze dominated last year and investors rode that momentum into 2021, the crowded market has cooled slightly as many of the vehicles continue to search for their perfect mate.

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Those changing market dynamics have created an adjustment in the terms of some SPACs — in an attempt to make the vehicle more attractive to investors — and shifted where some are looking for that much-needed target.

While there were just under 300 SPACs formed in the first quarter of 2021, the second quarter saw a slowdown, with fewer than 50 announced and just 16 in July, according to an RBC Capital report.

The end of SPACs?

“People are saying, ‘SPACs are dead,’ ” said Patrick Galley, CEO and CIO of RiverNorth Capital Management. “No, SPACs aren’t dead. If you look historically, they are still on a pretty good pace.”

That is undeniably true. In 2019 there were fewer than 60 SPACs formed — so even with the slowdown the SPAC market still seems robust.

Galley said the current market, however, has made SPAC sponsors change up some of the terms. Sponsors are now overfunding the trust — adding extra money on top of the gross proceeds they raise for the SPAC — so investors who wish to redeem shares actually receive a return on their investment.

In addition, sponsors are cutting the time to find a prospective target from the typical 18 to 24 months to now 12 months, with the ability to extend an additional three months twice — for a total of 18 months to find a target.

However, every time one of those extensions is exercised, more money gets put into the trust. Galley said in some instances, initial investors who redeem shares at the end of an 18-month process would receive a 3 percent return plus interest.

The added return is in an effort to make buying into the SPAC more attractive.

“It’s not surprising,” said Mitchell Presser, a partner at Morrison & Foerster and co-chair of the firm’s global corporate department. “It’s much tougher to raise money for a SPAC this quarter than it was in the first quarter.”

Presser said investors are seeking quicker deals and faster returns in the current market, so the changes add more incentives for investors.

“Sponsors are willing to overfund to give more guarantees to investors,” Presser said. “It’s a reaction to a tougher market.”

Galley said he thinks the recent changes in the SPAC market are a reaction to some degree to the general pullback in the public markets, as well as media coverage of the U.S. Securities and Exchange Commission’s statement in the spring that SPAC warrants — securities that allow the holder to buy stock at a fixed price called until a later expiration date — should be accounted for as liabilities.

Like many, Presser said he is not sure these are permanent changes.

“You likely will see the SPAC market come back,” he said.

Widening the target range

With a slightly condensed time frame to find a target, the obvious question remains: How many of these vehicles are going to find suitable targets?

“Ultimately, that’s the story,” Galley said.

There are nearly 400 SPACs currently looking for targets, according to RBC, and Galley said about another 200 are in the pipeline.

Where and when those targets will emerge is a question many involved in SPACs are likely asking.

“Ideally, SPACs chase deals not identified by the entire market,” said Presser, comparing SPACs to private equity firms in the sense that they try to identify proprietary deal flow.

People should expect an evolution in the SPAC market, he added, which includes where targets are geographically and what sectors they may be in.

Some are already looking abroad. In March, Israel-based social trading and investment marketplace eToro announced a $10 billion deal to go public through a SPAC from New York-based Cohen & Company’s Chairman Daniel Cohen. In April, Singapore-based ride-hailing company Grab agreed to a SPAC merger worth nearly $40 billion with Altimeter Growth Corp.

While there has been a good number of SPACs in Asia focusing on Asian targets, other markets have been slightly slower, Presser said.

“Other markets haven’t developed the SPAC model yet,” he said. “Europe has not caught the same excitement over it the way Asia and the U.S. markets have.”

However, tech companies on the continent may be more than willing to merge with a U.S.-based SPAC as a way to raise significant money, said Pierre Suhrcke, a venture partner at European investment firm TempoCap.

“Yes, absolutely, I think companies would be interested in SPACs here,” he said. “A path to go quickly on a public path would certainly be of interest.”

The disappointing IPO of London-based meal delivery company Deliveroo could make the SPAC market in the U.S. even more attractive to companies that are now leery of a more traditional listing in Europe, Suhrcke said.

“The market in the U.S. is just so deep and mature,” he said. “Also, there’s a bigger retail investor group there.”

Suhrcke said he does expect more U.S.-based SPACs to eye European targets, but there could be added competition in the market if more European SPACs start to be formed.

“It’s just not caught on here in the same way,” he said. “We just need a couple of successful SPACs, though, and it could.”

Illustration: Dom Guzman