October 23, 2021

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Hangover strikes Wall Street after ‘epic’ Spac party

4 min read

Special purpose acquisition companies updates

There was a sense of reality starting to bite when financiers behind one of the great booms in markets in recent years gathered last month for the annual investor conference of the Wall Street charity Robin Hood Foundation.

Robin Hood chose as its headline guest Jay-Z, the rapper whose songs include Can’t Knock the Hustle. But some at a conference panel on so-called special purpose acquisition vehicles seemed ready to acknowledge the game has changed.

For more than a year now, Spacs have been on a tear. The blank cheque companies raised some $180bn in the year to July, according to Refinitiv data, and became a driving force in two crucial segments of the market — initial public offerings and mergers and acquisitions.

But now regulators are closing in on the market, leading to a sharp fall in activity and one prominent deal casualty this week. Funds raised by US-listed Spacs dwindled to just $3bn in April from $35bn in March while the number of new vehicles fell to 13 from 109.

As one of the most prominent Spac bankers told the private panel event at the Robin Hood conference, it has been “an epic party followed by an epic hangover”. The banker should know — he is Credit Suisse’s Niron Stabinksy, who has earned the nickname “Mr Spac” for his longevity in the market.

Spacs, which raise money from investors through a public listing and use that cash to hunt for a private company to then take public, have transformed IPO markets. They have offered a quick route to market for companies in fields as diverse as flying taxi company Joby Aviation to Richard Branson’s space tourism business Virgin Galactic. Jay-Z himself teamed up with a Spac called Subversive Capital Acquisition that agreed a deal to take two cannabis companies public.

Goldman Sachs estimates there are still 400 US Spacs with $118bn in cash looking for deals.

But they are now facing a tougher regulatory environment with the new administration in Washington. Gary Gensler, new head of the Securities and Exchange Commission, has made no secret of his desire to rein in the Spac frenzy and ensure investors receive accurate disclosures. 

SEC officials have already issued warnings about the outsized benefits that those backing a Spac, known as sponsors, receive for putting little skin in the game. They have also advised investors not to invest in a Spac just because a celebrity is involved with it. 

Perhaps the most effective SEC move was a notice that many Spacs had to change the way they account for warrants, a key feature that rewards early investors with a cheap option to purchase shares in the merged company. The regulator said warrants had in certain cases been misclassified as equity when they should be considered liabilities, putting a brake on listings.

A further sign of regulatory intent came this week with a blow to a Spac backed by billionaire hedge fund manager Bill Ackman. The investor said the Wall Street watchdog “put a dagger in the heart” of the deal to acquire a 10 per cent stake in Universal Music through his Spac, Pershing Square Tontine Holdings.

Ackman said the SEC had landed the ultimate “deal killer” by communicating that the transaction did not meet New York Stock Exchange rules, where his Spac is listed. 

At issue was a complicated structure that Ackman and his advisers had come up with to solve one of the key challenges facing his shell company — at $4bn, it had too much cash and too few targets it could go after. After spending $4bn on the Universal stake, Ackman’s hedge fund Pershing Square would replenish the cash in the Spac, adding $1.6bn to hunt for a company to take public. Investors also got the option to buy into another deal through a newly created entity that did not require cash upfront. After the SEC move, Ackman called the deal off. 

Pershing Square will now acquire a $2bn stake in Universal, the music group with the option to buy the remaining half before September. People familiar with the transaction say it will be funded through a co-investment vehicle. 

Elsewhere the securities regulator recently brought space transportation start-up Momentus’ ambitions to become a publicly listed company back to earth. It issued fines against the company as well as Stable Road Acquisition, the Spac it agreed a deal with at a $1.2bn valuation, for misleading investors.

Much hyped electric vehicle companies, including rivals Nikola and Lordstown Motors, are also being investigated by the SEC. And retail investors also appear to be tiring of Spacs.

The ensuing slowdown has been welcomed by critics. It might even be a slight relief for exhausted bankers and lawyers who were inundated with Spacs deals as the craze reached fever pitch.


2021-07-24 00:10:29

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