By Sydney Halleman in Charlottesville, Virginia, and Yiqin Shen in New York
US special purpose acquisition companies (SPACs) remain attractive this year despite a recent lull in IPOs and an unexpected regulatory shift, industry experts said during Mergermarket’s M&A Momentum: USA Webinar last week.
“The [SPAC] market is going to remain vibrant, just because there's too many of them not to,” said Rick Lacher, managing director at Houlihan Lokey [NYSE:HLI]. “But I do think some of the excesses that we may have seen prior to the last month, I think you'll see that moderated a little bit.”
Around 310 SPACs year-to-date have debuted publicly, which is 25% more IPOs than in all of 2020, Lacher noted. SPAC debuts came to a halt in April, however, due in part to the US Securities and Exchange Commission’s new guidance on warrants and other factors. There were only 13 SPAC IPO pricings in April, down from a record 109 IPOs in March and 98 in February, Dealogic data shows.
“The market has traded down a little bit,” Lacher said. “Some of the ‘easy money’ that was being made is no longer being made.”
On 12 April, the SEC suggested warrants issued in SPAC transactions should be treated as liabilities instead of equity. The guidance came as “a surprise” to many law firms and investment banks, who went through “a scramble” to understand the new guidelines, said Brent Steele, a partner at Sidley Austin.
But the change isn’t expected to fundamentally alter investor and sponsor outlooks on SPACs, Steele said, cautioning that further regulatory scrutiny from the SEC and other agencies may come in the future.
Recent "remarkable demand” in the SPAC market has also impacted the flow of private investment in public equity (PIPE), Steele said, which has “tensed up” recently during the SPAC boom.
“There are a lot of PIPE investors who just have many open deals right now and are not interested in committing to additional deals when their current commitments are still pending,” he said.
Lacher echoed Steele’s sentiment, adding that the overwhelming amount of SPACs has stretched the capacity of PIPE investors. At the height of the SPAC market, Lacher saw some due diligence processes being condensed to “as little as two to three weeks.”
Still, Lacher sees numerous incentives in SPACs despite the hurdles. Sponsors, who are typically allowed to buy company stakes at a deep discount and make quick, possibly big returns, would still have the incentives to launch blank-check companies, Lacher said. “If it works, it works extremely well—that's why we have seen a lot of serial SPAC issuers.”
On the investor side, institutional investors face a “relatively risk-free investment,” especially for those who get in early. Hedge funds have heightened interest in joining SPAC stock trading, further fueling the market, he said.
Investment banks, law firms, accountants, and others also face powerful motivators for participating in SPACs because of the billions of dollars of fees that they collect, Lacher said.
“So it is that like many things, in and around Wall Street, if there are ways to make money, they will figure out how to do it,” he added.
Mark Williams, chief revenue officer at Datasite Americas, cautioned that “there might be more SPACs than actual companies able to go through the SPAC process.” Valuations and the new legal framework environment could further impact how many SPAC raises and de-SPAC processes are completed, he added.