Markets

SPACs, which dominated IPO conversations last year, have gone quiet

A volatile market and new regulations have cooled interest.
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Andrii Yalanskyi/Getty Images

· 4 min read

Venture capitalist Chamath Palihapitiya—once referred to as the SPAC king— has announced he is winding down two of his SPACs because he wasn’t able to find companies to fund. One big reason, Palihapitiya wrote in his newsletter, was market volatility that made some management teams skittish about going public in current market conditions.

“Looking back, I am proud of the companies we helped bring public—Virgin Galactic, Opendoor, Clover Health, SoFi, ProKidney, and Akili,” he wrote. He added that his view on SPACs had not changed, that they were “just one of many tools in our toolkit to support companies as they enter subsequent stages of growth.”

SPAC mergers, the hot investment vehicles of late 2020 and early 2021, have cooled off this year. In 2020, 248 SPACs went public; last year that number more than doubled, to 613. But so far in 2022, only 76 SPACs have gone public, according to SPACInsider.

So the question becomes: Have SPACs had their moment and fizzled out, or will they rebound in popularity once (if) the markets stabilize in the coming months?

David Ethridge is IPO services co-leader at PwC in the US, and works to help companies get ready to go public. He points to 2017 (34 SPACs) and 2018 (46 SPACs) as the beginning of the recent SPAC surge.

“Ultimately you had a change in the ecosystem of SPACs, where you have more prominent management teams, more prominent banks, more prominent lawyers all getting involved,” Ethridge said. In 2019, there were 59 SPACs, which he said felt “kind of amazing” at the time.

As SPACs began to catch fire over the past few years, the government response to the Covid-19 pandemic poured some gasoline on the fire, Ethridge added; stimulus funds flooded into the economy and needed a place to go.

“And at the time, when the world was sort of falling apart around them, people said, ’Well, I can park my money with these guys for two years. And if I don’t like the deal they’re doing, I can get it back.’”

Not all the SPACs of the past few years have been runaway success stories; more than a few have fallen short of their revenue projections. For instance, the stock price for SoFi Technologies, which went public via SPAC merger in June 2021, has dropped sharply since, and is trading below its initial IPO price.

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And as many approach their two-year expiration dates, nearly 600 SPACs are still seeking companies to acquire.

In their white paper “A Sober Look at SPACs,” Stanford University professor Michael Klausner, NYU professor Michael Ohlrogge, and research associate Emily Ruan found that in SPAC mergers between June 2020 and November 2021, the net cash per share averaged well below the $10 that investors paid for each share. So while a successful SPAC is a good deal for initial investors, those who invest post-IPO can incur steep losses, according to the paper.

Earlier this year, the Securities and Exchange Commission proposed new rules that would improve the transparency of SPAC deals. “Functionally, the SPAC target IPO is being used as an alternative means to conduct an IPO,” SEC Chair Gary Gensler said in a statement. “Thus, investors deserve the protections they receive from traditional IPOs, with respect to information asymmetries, fraud, and conflicts, and when it comes to disclosure, marketing practices, gatekeepers, and issuers.”

There may not be much appetite for IPOs in the current market conditions, and whether SPACs will rebound still remains to be seen. Ethridge focuses on the Russell 2000 index, which he says is a better benchmark than other exchanges against typical IPO companies. It’s down “significantly” this year, he noted. Before IPOs and SPACs begin to pick up, he said he’’d expect a “settling” of that index. But there are a lot of macro issues in the economy that still have to be worked through, he added, like the supply chain disruptions, the war in Ukraine, and inflation.

“What I will say is I don’t think it’s going to be large company carve-outs from bigger parent companies that go public and are highly anticipated because they’re high-quality, great companies,” he said. In previous market downturns, Ethridge added, the companies that turned around the IPO market were smaller ones that other businesses in the pipeline could compare themselves to in terms of growth and profitability. So Ethridge said it’s not likely to be a big company listing that gets IPOs going again, despite what media reports might suggest, as most are “calling for the next massive company that’s coming to be the one that opens the [IPO] market. And I just can’t point to a time where it did.”—KL

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