SPACs are cooling, but money can continue to flow into IPOs

Venture capital has started strongly in 2021, although recently the market has suffered some blows that could be pointing to a changing landscape.

So far, the figures for the beginning of the year have been staggering, with a record $ 1 billion “unicorn” companies coming to market, as well as an increase in initial public offerings overall and SPAC verification in white that have attracted large amounts of money for investors.

Special-purpose acquisition companies raise capital in an initial public offering and use the proceeds to reclaim a private company and make it public.

“There seems to be an infinite supply of capital looking for a home,” said Conor Moore, national leader at KPMG Private Enterprise, a global professional services consultant.

The money flows “particularly to end-stage investment in companies that will either continue to grow exponentially in a post-pandemic world or at least continue the growth they have had over the past twelve months,” he said.

A report released Wednesday by KPMG reveals how much money is flowing.

In the first quarter, the U.S. saw the birth of a record 64 unicorns, or private companies that had amassed a $ 1 billion valuation. This group alone accounted for approximately 40% of total venture capital financing from January to March.

There were also 328 SPACs during the period: companies that went public and got money from investors without having a specific direction on where they would be spent.

Traditional IPOs also skyrocketed, with part of the $ 69 billion in venture capital money spread across 3,042 transactions. There were nine $ 1 billion bids worldwide, also a new record.

The big question is where can such a blunt pace continue. April has seen a precipitous drop in SPACs in particular, and worries that fears of losing cash inflows may end.

Moore said he is mostly optimistic about the landscape, though he sees some changes.

On the one hand, Moore said those who try to make companies public realize that it is more difficult than it seems and that they will need patience. He also sees possible regulatory hurdles and said valuations in some parts of the capital markets are spreading.

“There will be companies and verticals that will continue to do very well,” he said. “There are some assessments that under most rational methodologies make no sense.”

Sectors he hopes to do well in attracting speculative cash to investors include life sciences and health technology as the economy continues to recover from the Covid era. Companies that take advantage of certain work trends from home are also well positioned, while gyms, urban restaurants and delivery companies could struggle amid the new landscape.

He expects the precipitous drop in SPAC activity by April to be ephemeral, although there are some factors working against so-called blank check companies.

Companies that “receive little revenue and weigh in on projections” could be subject to greater control by both the public and regulators, said Scott Denne of 451 Research, which is part of S&P Global Market Intelligence.

For example, about a third of technology vendors acquired by SPAC this year see revenue growth of less than 15% in 2021, Denne noted. This contrasts directly with the 2020 trend, when SPACs were one of the most exciting investment trends.

However, last week there was no SPAC issue nor any so far, as performance has slowed considerably compared to its operation last year.

“Given the collapse in performance since the end of February, it’s not uncommon for the record to stop sounding,”
Bespoke Investment Group said in a note. Shares of SPAC with lower yields have fallen 58% since the February peak, Bespoke added.

However, with fiscal and monetary stimulus continuing to pour into markets and investors investing money in equity-related assets at a record rate, it is likely too early to cancel IPOs and SPACs.

“The whole issue of bubbles has not been a broad bubble, but bubble pockets, pockets of excitement that have certainly focused on SPACs,” said Quincy Krosby, chief market strategist at Prudential Financial.

“The money will keep coming in as long as they think it will be profitable, and that’s why we’re studying the second quarter,” he added.

Companies “want to be able to list as quickly as possible, taking advantage of the fact that financial conditions remain liquid. This is important for the stock market,” Krosby said.