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Higher-quality SPAC sponsors must emerge for once red-hot space to turn around


Traders work on the floor of the New York Stock Exchange (NYSE) in New York, on Monday, Aug. 23, 2021.

Michael Nagle | Bloomberg | Getty Images

SPACs are getting a much-needed reality check after investors and regulators grow wary of the Wall Street craze, and the majority of deals could have a hard time surviving with time running out.

Blank-check deals were once a reliable way to place a bet on an IPO boom. However, the market is experiencing a washout as a large number of new issues are trading below their initial price. CNBC’s analysis of SPAC Research data revealed that 97 percent of the more than 300 SPAC pre-merger deals are trading below the $10 mark.

Due to cooling demand and shareholder redemptions, most SPACs trade for less than their initial IPO cash. The SPACs are facing a time crunch to locate a partner to merge in an overcrowded market. SPACs that fail to close a deal in a given time frame will be liquidated and returned capital to their investors, less expenses.

Chris Conforti of Altimeter Capital Markets Platform stated, “It is clear that not all SPACs can be created equally and the market has potential for consolidation.” “I believe the market will eventually consolidate in the same way that private equity and venture capital did. There are only a handful high-quality sponsor partners who can assist companies going public.

The bubble burst was inevitable because the market had grown far too quickly in an era of speculation. SPACs were a viable alternative to IPOs and attracted large amounts of capital from potential investors looking for a chance to be among the first on Tesla’s next generation. But the truth is that SPACs, as an alternative to IPOs, often fail to provide long-term benefits, while shareholders are sometimes left behind.

Special purpose acquisition companies (SPACs) are an acronym for special-purpose acquisition companies. They raise capital through an IPO, then use that cash to merge with a private firm and make it public. Usually, this happens within two years. A SPAC is typically $10 per unit. They do not price based upon the valuation of existing businesses, which is unlike a traditional IPO.

According to Bespoke Investment Group data, there were 89 deals in the SPAC market during the first quarter. Since April, only 9 of those deals have been completed with funds totaling $1.6 billion.

David Kostin (head of U.S equity strategy, Goldman Sachs) stated in a note that “Regulatory and legal issues continue to cloud the issue outlook.” After deal closure, SPAC returns were weak.

‘Ultimately go away’

Increased scrutiny on the market has brought to light some SPAC features that are unfair to shareholders, especially retail investors.

Elizabeth Warren and the Senate Democrats spoke out last week against some of the most powerful names in SPACs. This included Chamath Palihapitiya. The letter questioned “misaligned rewards between SPAC’s creators, early investors, and retail investor,” the senators wrote.

Sponsors often enjoy a large benefit from SPACs. Blank-check company sponsors are paid so-called “promote fees,” which typically entitle them to 20% of the total shares outstanding following the IPO for free or at a big discount. This usually leads to immediate dilution of target-company shareholders.

Conforti reports that SPAC sponsors tend to avoid investing in public companies and are able to quickly turn their sponsor promote shares, regardless of how successful the company may be.

“We expect that the vast majority of these types of sponsors and market activity will ultimately go away as company executives and boards demand more aligned incentives,” Conforti said.

In April, Altimeter announced its Altimeter Growth Corp. will merge with Southeast Asia’s ride-hailing giant Grab in a deal that values the company at $39.6 billion — one of the largest blank-check mergers to date.

Grab has a 3-year lockup on its sponsor promote share. Altimeter Capital Management made a $750 million direct investment to become the biggest PIPE investor.

— CNBC’s Nate Rattner contributed to this article.