You can’t look at any financial media and not see some sort of ominous headline about SPACs. It is true that today’s SPAC market looks nothing like the one we saw in late 2020 through February 15 of this year. However, what is often lost in headlines about SPACs is that the current SPAC market is bigger, more institutionalized, and more evolved. The SPAC market has also settled into how it should be looked at by investors: pre-merger SPACs are an event-driven strategy that is not necessarily correlated with stocks and bonds, while investing in DeSPACs is a hyper growth strategy, with high risk and possibly high reward.
The pre-merger SPAC market started to show signs of life in June with 31 IPOs, but there are still signs of stress in DeSPACs. The massive number of SPAC IPOs in late 2020 and early 2021 has resulted in too many SPACs chasing too few deals. A number of factors haven’t helped, including regulatory uncertainty, some high profile DeSPACs having had high profile problems, poor performance of DeSPACs as a whole, and a drying up of PIPE money. All of these factors have given rise to redemptions on DeSPAC deals. According to Cantor Fitzgerald, deals with votes held from 6/17/2021 to 7/15/21 had redemptions of 32%, with nearly 40% of deals reporting redemptions greater than 50%. Redemptions are important as valuation assumptions usually assume that the full cash in trust will be available. Pops on day one are now increasingly rare.
Going forward, we continue to believe the environment will stabilize as announcements and closings are outpacing new issues.
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