Estimated reading time - 5 minutes
As the SPAC market went from strength-to-strength last year and investors rode that momentum into early 2021, the market cooled dramatically in Q2 and Q3 of this year, as many SPACs still continue to search for their ideal target.
Sponsor teams are now facing increased competition for target assets, risk-aware investors who are less willing to quickly deploy capital and increased regulatory oversight and competition from further afield as European listing venues embrace reforms to welcome SPACs. In this crowded market, what can SPAC sponsor teams do to differentiate themselves to investors? How can they respond to increased regulatory oversight and governance? And how can sponsor teams avoid the pitfalls that will lead to a large number of SPACs failing to consummate a business combination in the months ahead?
SPAC slowdown facts
According to CNBC, roughly 97% of the existing  pre-merger SPACs are now trading below their key $10 offer price level, amid cooling demand and an increase in shareholder redemptions. But how did we get to this point after such a robust start to the year? It’s now apparent that the market started to fundamentally shift for SPACs starting in Q2 following:
- New US SEC regulation that has increased scrutiny on SPACs with a change in the accounting treatment of warrants which must now be accounted as liabilities
- Increased political scrutiny on the market, which has brought to light a perceived misalignment of incentives between SPAC founders and early investors on the one hand, and retail investors on the other; a recent letter from Sen. Elizabeth Warren and other leading Democrats highlighted this in mid-September
- An adjustment in the structural terms of SPACs to address some of these concerns and make the vehicles more attractive to investors
- Sponsors are now having to overfund the trust at SPAC formation to provide a return to investors on their initial investment should a business combination not be consummated
- Decrease in the window of opportunity for SPACs to find an appropriate target from 18-24 months to 12 months, with the ability for 3-month extensions thereafter should sponsors contribute more cash into the trust, making the terms more attractive for investors
The result of the market slowdown is that it is now much tougher to raise money for a new SPAC IPO than it was in late 2020 / early 2021. Not only this, but the market for private investment in public equity (PIPE) issuance also contracted in recent months as investors have become more disciplined with the due diligence process in evaluating potential business combinations after a spate of rushed and ill-suited M&A. On the other hand, SPAC boards have also responded to the rush to acquire assets (and often overpaying), with many more now requiring usage of independent fairness opinions as best practice. Add to this, a changing landscape for SPAC listings with new exchanges (e.g., London Stock Exchange) promoting reforms in order to capture a piece of the SPAC action.
In totality, this all adds up to a much more difficult environment for sponsor teams.
Sponsors will have to respond to increased competitive pressures, regulatory and governance oversight and a weary investor base by focusing their efforts on accurate and transparent disclosure and intensified investor engagement during the SPAC life-cycle. No doubt, sponsors that fail to adequately disclose and also analyse and understand the feedback and opinions of their shareholders and potential investors will be at a disadvantage in an already crowded and competitive market.
At Praexo, we are strong believers in using a digital approach to manage these interactions and analysis, and have designed an interface that has specific applicability for investor relations, disclosure and workflow management throughout the SPAC life-cycle. For more information on our offering, get in touch with a member of our team now.
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