Per reporter: Wen Qiao Per editor: Lan Suying
Image source: Photo Network - 401005182
In 2020 and 2021, in the star-studded US stock IPO market, SPAC (Special Purpose Acquisition Company) was listed as a dark horse, and its fundraising scale accounted for more than half. However, after the frenzy of the past two years, the SPAC business seems to have shown signs of cooling in the United States.
Since the beginning of the year, the number of SPAC transactions in the United States has plummeted. As of May 15, the number of SPAC listings in the United States was 67, a sharp decline of 89% from the same period last year.
Wall Street investment banks led by Goldman Sachs, Citi and Bank of America also heard the news of departures, saying that they would terminate or reduce their SPAC trading operations. In the 16 months since the beginning of last year, Goldman Sachs, Citi and Bank of America have collectively accounted for more than 27 percent of U.S. SPAC transactions, underwriting about $47 billion, according to data compiled by Bloomberg.
However, in contrast to the cold SPAC in the United States, the Singapore Exchange and the Hong Kong Stock Exchange both ushered in their first SPAC listings this year, and are expected to heat up.
Why did the once hot SPAC market suddenly find cold in the US stock market? How are SPAC in U.S. and Asian stock markets different? Why is there such a sharp contrast? The Daily Economic News reporter interviewed Jay R. Ritter, former president of the International Financial Management Association, Perrie M. Weiner, partner of Baker McKenzie's Los Angeles office, and Usha Rodrigues, a law professor at the University of Georgia, to answer questions one by one.
Goldman Sachs, Citi and other investment banks in the "evacuation"
The "Daily Economic News" reporter inquired about the SPAC Insider data and found that from the beginning of this year to May 15, the number of SPAC listings in the United States was 67, down 89% from 613 cases in the same period last year; the total amount of funds raised was 11.63 billion US dollars, while the cumulative fundraising amount in the same period last year reached 162.53 billion US dollars, down nearly 93% year-on-year; the average listing size of the company was 170 million US dollars, which also hit the lowest since 2015.
Image credit: Screenshot of SPAC Insider
Wall Street banks are also rapidly withdrawing from the once-hot SPAC market.
Goldman Sachs will cease to participate in most of the special purpose acquisitions it assists in listing and suspend new U.S. SPAC offerings; Bank of America has also scaled back its cooperation with some SPAC-listed companies and is evaluating policies related to SPAC deals, possibly with further retreats if necessary; and Citigroup said in April that it would suspend new SPAC offerings in the U.S. until it has a clearer understanding of potential legal risks.
The reporter noted that the above-mentioned large banks occupy a pivotal position in the SPAC market as underwriters. In the 16 months since the beginning of last year, Goldman Sachs, Citi and Bank of America have collectively accounted for more than 27 percent of U.S. SPAC transactions, underwriting about $47 billion, according to data compiled by Bloomberg.
Reuters pointed out in a report that investment banks have made billions of dollars in the past two years with the SPAC frenzy. The report takes a specific case as an example, at the end of 2020, in the SPAC transaction between Acies Acquisition Corp and Playstudios Inc, although underwriters such as JPMorgan Chase did not disclose specific fees, but according to financial data provider Refinitiv, JPMorgan Chase had underwriting fees of $4.7 million, Morgan Stanley $5.9 million, Oppenheimer 1.2 million, in addition, Each bank also received about $1.6 million in private placement fees.
According to public information, SPAC's initial public offering (IPO) process differs from traditional IPOs in that the former is a shell company by an individual or institutional investor, which only has listed funds and has no actual business, so it is also known as a shell company. Shell companies are listed on exchanges and raise funds by issuing common stock and warrants to investors in the form of investment units.
The raised listing funds will be deposited in a trust account, the shell company has 1 to 2 years to find the target company and merge with it, so that the new company can obtain financing and go public, if the merger is not completed, the investor will get back the principal and attach a certain interest.
Behind the "withdrawal": the redemption rate of transactions once exceeded 90%...
After making a lot of money, why did Wall Street investment banks "stop playing"?
"The regulations proposed by the U.S. Securities and Exchange Commission (SEC) will impose significant liability on banks, and [banks] have not chosen to take responsibility, but have opted out of the market," Usha Rodrigues, a law professor at the University of Georgia, said in an interview with the Daily Economic News. "There are also economic factors, but tighter regulation is the biggest reason for the market contraction."
At the end of March this year, the SEC proposed a regulatory draft for SPAC, aiming to strengthen the information disclosure level of SPAC companies, curb the information asymmetry, securities fraud, conflicts of interest and other issues in the SPAC format, and enable SPAC investors to receive the same protection as traditional IPOs. Bloomberg notes that the clauses make it easier for investors to file lawsuits against false predictions.
"Regulators seem to believe that SPAC is taking advantage of retail investors and also enabling private companies to circumvent regulations that normally govern IPOs, which is bad for the market," Rodrigues said.
The SEC's "iron fist" doesn't stop there. Perrie M. Weiner, a partner at Baker & McKenzie's Los Angeles office, told reporters, "The SEC is also seriously considering whether the private securities litigation reform act (PSLRA) safe harbor protections should continue to apply to SPAC M&A transactions." In fact, this is one of the key advantages of SPAC over traditional IPOs. The act protects companies and directors from litigation in certain circumstances, such as making inaccurate or misleading forward-looking statements in certain public documents.
In addition to stricter regulation, stocks listed on SPAC trading have not performed well in the past two years. The CNBC SPAC Post Deal Index fell 44.8 percent in 2021 and nearly 20 percent in the first quarter of 2022. The index includes SPACs that have completed the merger to list the target company, reflecting the performance of the company's share price after the listing of the SPAC.
CNBC Post SPAC Index Chart Since June Last Year Image Source: CNBC Screenshot
The "Daily Economic News" reporter noted that the stock prices of some companies listed through SPAC have been "cut down" compared with the early stage of listing, and there are many star companies.
SoftBank-backed Southeast Asian ride-hailing giant Grab is one of them. In April 2021, Grab created the largest SPAC listing for nearly $37 billion, but by the close of trading on May 15, its share price had fallen to $2.82, a 78% drop from $13.06 at the beginning of the listing. Virgin Orbit, a satellite launch company owned by Virgin Galactic that was listed on SPAC in 2020, closed at $5.19 on May 15, down more than 43 percent from the early days of the listing.
Moreover, compared with 2021, the redemption rate of SPAC transactions is rising significantly. According to public information, SPAC is required to give public share holders the right to redeem the public shares held in the trust account in proportion, and if the public shareholders do not approve of the merger, they can choose to exercise their repurchase right and redeem the IPO funds deposited in the trust account in the corresponding proportion as consideration to withdraw from the SPAC.
According to foreign media data, the redemption rate of SPAC transactions reached a peak in the first quarter of this year, with an average redemption rate of more than 80%. Among them, the data in February climbed to more than 90%, compared with only 10% in the same period last year. For listed companies, the high redemption rate reportedly means that the cash inflow will be significantly reduced, and some companies will even have to refinance through other external investor channels to pay for the cash needed during the transaction.
"Companies that tend to have high redemption rates don't have good shareholder returns," Rodrigues said. The Virgin track, where the stock price is close to "waist cut", is a case in point. In 2021, Virgin Rail faced a redemption rate of up to 82.3%, but it was finally mitigated through other financing methods.
Jay R. Ritter, former president of the International Financial Management Association, told the Daily Economic News, "Compared with traditional IPOs, the high cost of SPAC and the disappointing return on investment have reduced the enthusiasm of both operating companies and investors for SPAC." ”
"Pause" vs "Permanent Shutdown"?
In fact, 2020 and 2021 are not the first time the SPAC tide has hit. The SPAC market experienced a peak of development around 2006-2007, and then gradually cooled down with the financial crisis. Until December 2019, with the sports bookmaker DraftKings. Inc went public through SPAC, and the U.S. stock market once again set off a wave of SPAC.
For the opening of this wave of SPAC, Weiner explained to reporters, "Traditional IPOs take 9 to 12 months to complete, while SPAC can be completed in 6 to 9 months. While traditional IPOs are mostly geared toward institutional investors, SPAC provides access for small retail investors. ”
However, companies listed through SPAC need to take on more risk than traditional IPOs. Ritter argues that "companies that are young and difficult to make a profit are more risky, especially when they have high valuations." SPAC acquisitions in 2021 are mostly young companies, many of which have failed to meet optimistic expectations and have low returns for investors. ”
"The traditional IPO process is much slower, due diligence takes longer, is more reliable, and underwriters and companies take on more responsibility. That's why it's relatively less risky," Weiner said.
With the rapid "fever" of the SPAC boom in the United States, will SPAC stagnate or will it be favored by the market again?
"I think the SPAC boom is over, and even if U.S. stocks start to rise again, it won't recover," Ritter said, "Right now, there are only about 10 SPAC cases a month." While there are currently more than 700 SPCs that need to be completed in less than 2 years, the vast majority will be liquidated. The funds will be returned to the investor, but the SPAC sponsor will lose all venture capital, typically $8 million per SPAC. The average return for sponsors is low, so few companies will go public through SPAC again. ”
However, in Weiner's view, this is just a "pause" in the SPAC market. "At present, the U.S. capital market is generally in turmoil, not limited to SPAC. Once the SEC resolves this market issue and develops clearer rules, SPAC will continue to evolve and the pace will accelerate because it is more flexible and geared toward small investors than traditional IPOs," he explained. But either way, it will all be resolved in 6 to 9 months. ”
The "Daily Economic News" reporter noted that in contrast to the "cooling" of the US market, the Asian SPAC market is expected to usher in a booming opportunity. This year, the Hong Kong Stock Exchange witnessed the first SPAC listing, and the SGX also welcomed the first SPAC-listed companies.
PwC expected in January that with the new rules for the SPAC listing regime formulated by the Hong Kong Stock Exchange, it is expected that 10-15 SPCs will be listed in Hong Kong in 2022, raising about HK$20 billion to HK$30 billion.
According to reports, in early April, Shenshi Acquisition Enterprises Co., Ltd., with Wang Shi and Asia Investment Capital as the initiators, formally submitted a listing application to the Hong Kong Stock Exchange. Before Wang Shi, Li Zekai, He Youlong, Zheng Zhigang and other rich second and third generations from Hong Kong have already preemptively entered the game.
"Regulation in Hong Kong and Singapore (for SPAC) is much more flexible, and these regions are welcoming SPAC, which is ideal for helping some unicorn companies with a market capitalization of $1 billion or more quickly get the funding they need to expand," Weiner said. ”
Ritter told reporters that few companies in both Asia and Europe have gone public through SPAC in the past few years because underwriter fees and sponsor fees make costs very high. "Because of this, I don't expect SPAC to have a significant market share among newly listed companies in Asia."
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