SPACs break the 2020 record in just 3 months

The SPAC market took just three months to break its 2020 record, but maintaining that level of jaw growth will not be an easy task.

Funds raised through special purpose acquisition companies in the United States have totaled $ 87.9 billion so far in 2021, already surpassing last year’s $ 83.4 billion issue, according to SPAC Research data.

SPACs raise capital in an initial public offering and use the cash to merge with a private company and make it public, usually within two years.

“It looks like everyone is getting calls about these SPACs. SPACs are knocking on their doors,” said Dana D’Auria, co-CIO of Investnet PMC. “When there’s a market like this, of course, you just have to worry about the potential for long-term returns.”

The fiery industry faces many challenges to keep up with its meteoric rise.

Currently, with more than 400 offers looking for goals, good quality companies may be scarce. SPAC’s IPOs, many of which experienced higher speculative trading activity, have proven to be vulnerable to global market volatility. Meanwhile, higher interest rates make these growing companies, which are often ahead of revenue and pre-cash flow, much less attractive.

“For companies that rely on future earnings, if rates continue to rise, they will be more vulnerable than larger, more mature technology names,” said Quincy Krosby, Prudential Financial’s chief market strategist.

“They don’t have solid balance sheets and sometimes they don’t even have business,” he said. “Vulnerable parts of the market will be in danger.”

The CNBC SPAC 50 proprietary index, which tracks 50 U.S.-based pre-merger blank check contracts by market capitalization, fell more than 7% in March. This decline ended with the gains of the index for 2021.

The CNBC SPAC Post Deal Index, which includes the largest SPACs to hit the market and announced a target, also turned negative last year. The falls came as rising bond yields shook the stock market, especially growth-oriented technology names.

“Mid-market groups that previously didn’t have the level of sophistication to even orchestrate a IPO want to talk about SPAC’s OPOs,” said Anthony DeCandido, a partner at RSM LLP.

“Because there are so many troubled companies out there facing Covid’s liquidity problems, there will still be this extended period of buying opportunities for those groups that have the capital to enter the market,” he said.

The explosive popularity in the SPAC market has also attracted a large number of athletes and other celebrities to jump on the bandwagon, including NBA star Shaquille O’Neal, Alex Rodriguez and musician Ciara Wilson. Last week, the Securities and Exchange Commission issued a warning against celebrity-backed SPACs, urging investors to think twice before entering.

To show that the market is not just a precautionary tale on Wall Street, SPACs are evolving in their structure to become more investor-friendly and reduce the huge profit of sponsors.

Sponsors of blank check companies are paid so-called “promotion commissions,” which typically entitle them to 20% of the total outstanding shares after they go public for free or at a great discount. This reward usually results in an immediate dilution for the target company’s shareholders.

Some recent agreements have tried to bridge the gap between the returns that privileged people get and average shareholders.

Earlier this year, Morgan Stanley developed a new structure called Vehicle Stakeholder Aligned Initial Listing (SAIL) where sponsors receive promotions in increments based on stock performance.

“The idea, in the past, that you have this bombardment approach where you organize something and get them and before the price is diluted by additional property, these guys and girls are out … I don’t see it,” DeCandido said. and added that he saw interest in offers with a 5% promotion rate.