Matt Higgins, a former judge on the reality show Shark Tank, is an experienced investor, and his company, RSE Ventures, helps young companies build their businesses.
So it’s no wonder Higgins launched the SPAC in November 2020 to embrace one of Wall Street’s greatest recent obsessions. A special purpose acquisition company (known by the acronym) is a shell entity that sells shares to the public and uses those funds to buy a business. If SPAC cannot find a business to buy within two years, investors will get their money back.
Last summer, Higgins-backed SPAC Omnichannel Acquisition agreed to acquire fintech company Kin Insurance. However, in January, both sides closed the deal because of “unfavorable market conditions.” In May, Mr. Higgins decided it was enough. He has liquidated Omni-Channel and is returning $ 206 million raised by SPACs to investors.
“We worked months and months to prepare Kin,” Higgins said. “But the market has turned us on completely.”
The love affair with SPAC on Wall Street is sputtering.
After two hot and heavy years of investor spending $ 250 billion on SPACs, rising inflation, rising interest rates and the threat of recession have raised suspicion. Investors are increasingly withdrawing funds from the SPACs allowed at the time of the merger. With the recent crash in stocks of high-growth companies, we don’t want a successful SPAC merger, which often involves high-risk companies.
At the same time, regulatory agencies are stepping up SPAC scrutiny. The Securities and Exchange Commission has launched dozens of investigations into SPACs and is proposing stricter rules. Tighter regulations will reduce the profitability of SPAC transactions for the major investment banks that arrange these transactions. This is because we need to invest more resources to comply. They also started to turn back.
“I was able to see this cliff coming,” said Usha Rodrigues, a professor of corporate law at the University of Georgia School of Law, who has emerged as a leading SPAC guru.
The wreckage is piled up.
On Tuesday, Forbes Media became the latest company to abolish a planned merger with SPAC. According to Dealogic data, about 600 SPACs published in the last two years are still trying to close the deal. About half of them may not be able to find the target before the two-year window closes. Since the beginning of the year, at least 7 SPACs have been collapsed. Another 73 SPACs waiting to be released shelved the plan.That fund Track performance Of the 400 SPACs, it has decreased by 40% over the past year.
SPACs have been around for decades, but have long had an unpleasant reputation. Only companies with finances that cannot withstand investor scrutiny on their way to a traditional initial public offering have made public offerings using SPAC. Things changed in early 2020 when prominent financial companies, venture capitalists and start-ups adopted SPAC as a faster and easier route to the open market than an IPO.
Wall Street banks were too enthusiastic about arranging transactions for these cookie cutters at high fees. And investors are anxious for the returns they have eagerly bought.
Suddenly, everyone jumped into the SPAC tide, from hedge fund managers like Bill Ackman to celebrities like NFL quarterback Patrick Mahomes and tennis legend Serena Williams. Private investors were also involved as stock trading began during the pandemic. Even former President Donald J. Trump signed a deal with SPAC last year to open up his fledgling social media company.
“Why did VCs suddenly switch to SPACs? Because reputable investment banks have begun to undertake them,” said Mike Stegemorer, a professor of finance at Baylor University.
SPAC transactions are an important new source of income for Wall Street banks. Since its inception in 2020, the top 10 banks arranging SPAC public offerings have paid just over $ 5.4 billion, according to Dealogic. Citigroup, Credit Suisse and Goldman Sachs paid the largest fees.
Companies that go public through an IPO must go through a rigorous process according to strict rules. However, SPACs face little regulation, as the publicly available companies have not yet done business. Shares are usually sold for $ 10 per share.
Early investors also get warrants. This is a type of security that later gives you the right to buy additional stock at a given price. Warrants can be financially rewarded if SPAC shares rise after finding a merger partner.
SPAC has two years to find a business to buy. Otherwise, the money must be returned to the investor. Investors do not know which business SPAC will eventually acquire, so they have the option of redeeming shares when voting for a merger. This means that the merged entity could end up with much less cash than SPAC raises.
The SPAC boom was underpinned by long-term low interest rates, pushing investors into the more risky corners of the market in search of higher returns. SPACs were especially popular with hedge funds seeking to profit from the difference between the prices of SPAC stocks and the warrants they hold.
It helped prominent venture capitalists adopt SPAC as a faster way to expose technology start-ups. In late 2019, Richard Branson merged his aerospace company Virgin Galactic with SPAC, led by Chamat Palihapitiya, a Facebook executive who turned into a venture capitalist.The following year, the popular online gaming company DraftKings was unveiled on SPAC. handle Undertaken by Goldman, Credit Suisse and Deutsche Bank.
The SPAC format also provided a lifeline for companies like WeWork. WeWork had to withdraw its IPO in 2019, when investors rebelled against the office-sharing company’s finances. But when WeWork merged with SPAC last year and earned $ 1.3 billion in badly needed capital, it wasn’t an obstacle.
“Last year was one of the best years from a SPAC perspective,” said Gary Stein, a former investment banking analyst and entertainment industry consultant who has invested in such companies for nearly 30 years. “This year is probably one of the hardest years for me to navigate.”
Two things have chilled the enthusiasm for SPAC. Inflation is skyrocketing, the Federal Reserve is raising interest rates, and investors are urging investors to withdraw money from SPAC transactions and park elsewhere. Also, due to increased regulatory oversight of the SPAC market, these transactions are not attractive to the players involved.
In recent months, investors have been exercising their contractual rights to redeem SPAC shares more often. Historically About 54% of shareholders Choose to redeem the shares when the merger is announced. Currently, 80% of investors are regaining money in some cases. This will cause the merged company to lose most of its promised capital.
Concerns that too many investors might try to get cash for their stock stormed the merger of Kin Insurance with Omni-Channel Higgins’ SPAC. Media company BuzzFeed received only $ 16 million from the merger with SPAC. This is because investors have regained much of their $ 250 million profit.
Some recently completed SPAC mergers appear to be tough. When MSP Recovery, a medical proceedings and billing company, signed a SPAC agreement with Lionheart Acquisition Corporation II on May 24, its shares immediately fell 53%. They are currently trading for about $ 2. Neither Lionheart nor MSP Recovery returned a request for comment.
According to Audit Analytics, the Securities and Exchange Commission has launched 20 SPAC-related investigations since January 2020. Half a dozen involves electric vehicle companies such as Rosetown Motors, Lucido and Faraday Futures. We are also investigating a SPAC seeking a merger with Mr. Trump’s company.
Regulators have proposed rules that make it easier for shareholders to sue companies that merge with SPACs to make suspicious claims about fancy financial forecasts and capacity. Banks can also face increased responsibility for their work in such transactions.
Massachusetts Senator Elizabeth Warren was released on Tuesday Report It focused on conflicts of interest involving specific players in SPAC transactions. According to the report, “the process of bringing SPACs to market essentially gives institutional and financial institutions, the so-called” SPAC Mafia “, an advantage over individual investors.”
Some Wall Street banks are now away from SPACs and are concerned that they will be held liable for shareholder litigation for the hype by private companies that merge with SPACs.
Goldman has reduced its involvement in SPACs, partly due to “changes in the regulatory environment,” said Maeve Duvalley, a spokeswoman for the bank.
Law professor Rodriguez said that if a Wall Street bank could be held liable for a false statement by a company that merges with an SPAC, it would be as responsible as arranging a traditional IPO. rice field. She said the enthusiasm for SPACs would diminish as banks cost higher and customer fees rise.
According to Dealogic, of the approximately 600 SPACs scrambling to find targets before the market is completely closed, 270 are looking for at least a year.
Nathan Anderson of Hindenburg Research, a company that specializes in publishing important reports on listed companies, including SPACs, said supporters of these companies are desperate and may be unwise when choosing a merger partner. Stated.
“The quality of SPAC transactions was never high in the first place,” Anderson said. “And now it can get a lot worse.”
