SPACs become less secure as transactions get weirder, stocks turn upside down

Things are getting weird in the fiery SPAC market. A recreational SPAC is now doing a biotechnology transaction, while a cannabis testing company has ended up merging with a space company.

Sponsors are rushing to make their transactions in an increasingly crowded space, as more than 370 US companies with more than $ 118 billion in capital are trying to make a match, according to SPAC Research. Nearly 60 SPACs identified their merger targets in February alone, the largest month of all time, the data said.

“I’m bringing in lower-quality public companies,” said Ross Mayfield, an investment strategy analyst at Baird. “They face the ability of companies of reasonable quality, especially in niches that are popular.”

Faced with intense competition, time pressure and a volatile market, some SPACs had to settle for less than ideal targets and, in some cases, throw the whole plan out the window. And the rally of hot SPAC shares has begun to turn upside down as shareholders struggle to redeem when transactions prove disappointing.

The CNBC SPAC 50 Ownership Index, which tracks the 50 largest pre-merger vacancy bids in the U.S. by market capitalization, has fallen more than 15 percent in the past two weeks, giving up almost all of its 2021 earnings. CNBC SPAC Post Deal, which consists of the largest SPACs that came on the market and announced a target, dropped a similar amount and became negative for that year.

Last month, Leisure Acquisition Corp., a SPAC that initially targeted a recreational company, as its name suggests, announced a $ 200 million deal with Ensysce Biosciences, a biopharmaceutical company that combats drug overdose. Stable Road Acquisition Corp., a cannabis SPAC, has also made a major pivot and entered into an agreement with the space company Momentus.

While one or two cases do not make a trend, it has raised concerns that the quality of SPACs could deteriorate in the future, given the large number of outstanding bids. SPACs also compete with private equity firms, many of which still have a lot of dry powder to implement.

“There could be no transaction or there could be a transaction with a company that is not necessarily justified as a public company,” said Sylvia Jablonski, investment director at Defiance ETF, which launched the first SPAC ETF (SPAK) in September. . “If time has passed and they haven’t done it, there’s a chance they’ll make a bad merger to complete it, because now all this time, energy and investment has gone into it.”

Trade with SPAC, once it seemed likely to grow, may have begun to cancel out as more of the takeover flops chosen by SPAC. Market speculative areas also tend to be severely affected when volatility increases.

“The sharp end of the stick, which is the IPO space, will feel more pain when you have a risky move than other areas of the market,” said Justin Lenarcic, Wells Fargo, senior alternative investment strategist.

SPAC is a special purpose procurement company that raises capital in an initial public offering and uses the money to merge with a private company and make it public, usually within two years. Enthusiastic investors have piled up in shares of these empty corporate shells, hoping they will strike.

Some of the high-profile transactions trade more than 40% above their IPO price, including the $ 4 billion Pershing Square Tontine Holdings and two of Chamath Palihapitiya’s SPACs.

“Some people are a little satisfied when they hear that SPACs are risk-free, because you have the ability to buy back your interest if you don’t like the business … but you have to realize that it only works if you invest in the beginning.” , Lenarcic said. “It really depends on where you invest in the life cycle of SPAC.”

Many retail investors buy SPACs on the secondary market, which means they would most likely lose early pop into common stock, as well as the benefits associated with mandates. Meanwhile, for “buy-and-hold” investors who enter only after a deal is closed, they almost always lose money.

Regarding the issuance of the SPAC, there are no signs of slowing down. Funds raised in the first two months of 2021 are already competing with capital in a record year of 2020 – $ 68.5 billion compared to $ 83.4 billion last year, according to SPAC Research.

“The slow pace of issuance is probably unsustainable,” said David Kostin, head of US capital strategy at Goldman Sachs, in a note. “SPACs could generate more than $ 700 billion in procurement over the next two years.”

Some recent new shows are raising eyebrows on Wall Street. Last month, a SPAC called “Just Another Acquisition Corp.” was filed with the Securities and Exchange Commission to raise $ 60 million for a business in an unspecified sector. There is also “Do It Again Corp.” this week, a Delaware-based SPAC that could target restaurants and retail brands, according to a file.

“There could be a growing element of FOMO here,” Lenarcic said. “I think you have to be careful. You certainly have to understand that not all SPACs are created equal, certainly not all sponsors are equal and not all transactions will exercise.”

– Gina Francolla from CNBC contributed to the reporting.

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