SPACs are becoming less secure as bids become weirder and stocks occur

Things are getting weird in the spacious SPAC market. A leisure SPAC is making a biotech deal, while a cannabis control company ended up merging with a space company.

Sponsors are rushing to make their bids in an increasingly crowded space as more than 370 U.S. blank check companies with more than $ 118 billion in capital are looking to make a match, according to data by SPAC Research. About 60 SPACs identified their merger targets in February alone, the largest in history, according to the data.

“They’re making public lower and lower quality companies,” said Ross Mayfield, Baird’s investment strategy analyst. “They meet the capacity of companies of reasonable quality, especially in popular niches.”

Faced with intense competition, time pressure, and a volatile market, some SPACs had to settle for less-than-ideal goals and, in some cases, throw the whole plan out the window. And the concentration of hot SPAC shares has begun to roll as shareholders skyrocket to change when bids are disappointing.

The proprietary CNBC SPAC 50 index, which tracks 50 U.S.-based pre-merger blank check transactions by market capitalization, has fallen more than 15% in the past two weeks, nearly giving up to all 202 earnings. The CNBC SPAC Post Deal Index, which is made up of the largest SPACs that have hit the market and announced a target, fell a similar amount and became negative during the year.

Last month, Leisure Acquisition Corp., a SPAC that was initially targeting a leisure company as its name suggests, announced a $ 200 million deal with Ensysce Biosciences, a biopharmaceutical company that fights drug overdoses. . Stable Road Acquisition Corp., a cannabis SPAC, also made a big pivot and closed a deal with the space company Momentus.

While one or two cases do not make a trend, it did raise concerns that the quality of SPACs could deteriorate in the future, given the large number of pending bids. SPACs also compete with privately held companies, many of which still have a lot of dry dust to deploy.

“There could be no agreement or there could be an agreement with a company that is not necessarily guaranteed to be a public company,” said Sylvia Jablonski, investment director of Defiance ETF, which launched the first SPAC ETF (SPAK) in September. “If time has passed and they haven’t done any, there’s a chance they can just make a bad merger to complete it, because now all that time, energy and investment has been devoted to it.”

SPAC trading, once it seemed like it could only increase, might start to fall apart as more of the options chosen by SPAC. Market speculative areas are also often affected when volatility increases.

“The sharp end of the stick, which is the IPO, will feel more pain when you have a risk opportunity than other areas of the market,” said Justin Lenarcic, Wells Fargo, chief alternative investment strategist.

SPACs mean special-purpose acquisition companies, which 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. Enthusiastic investors have piled on shares of these empty corporate shells in hopes of getting home.

Some of the high-profile deals are trading at more than 40% above their IPO, including Bill Ackman’s $ 4 billion Pershing Square Tontine Holdings, and two of Chamath Palihapitiya’s SPACs.

“Some people are a little complacent when they feel that SPACs are risk-free because you have the option to change your interests if you don’t like the deal … but you also have to realize that it only works if you invest in the beginning.” , said Lenarcic. “It really depends on where you invest in the life cycle of the SPAC.”

Many retail investors buy SPAC in the secondary market, which means it would probably miss the first ordinary share of the pop, as well as the profits associated with the warrants. Meanwhile, for buy and hold investors who only access after reaching an agreement, they almost always lose money.

In terms of SPAC issuance, there are no signs of slowing down. The funds raised in the first two months of 2021 already rival capital from a full record year of 2020: $ 68.5 billion annually to $ 83.4 billion last year, according to SPAC Research.

“The strong issuance rate is probably unsustainable,” David Kostin, head of U.S. equities strategy at Goldman Sachs, said in a note. “SPACs could generate more than $ 700 billion in acquisition activity over the next two years.”

Some recent new broadcast raises eyebrows on Wall Street. Last month, a SPAC called “Just Another Acquisition Corp.” filed with the Securities and Exchange Commission to raise $ 60 million for a deal in an unspecified sector. There’s also “Do It Again Corp.” this week, a Delaware-based SPAC that could target restaurants and retail brands, according to a record.

“There could be a growing element of FOMO here,” Lenarcic said. “I think you have to be careful. You definitely have to understand that not all SPACs are created equal, certainly not all sponsors are equal and exercise.”

– CNBC’s Gina Francolla contributed to the notification.

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