Stock Selloff Crunches SPAC Creators as They Race to Find Deals

An investor giving up on risky deals squeezing SPACs is running out of time to find a company that goes public, potentially leaving their architects trade-free and incurring costly losses. big loss.

Companies that have listed shares through mergers with special purpose acquisitions have recently collapsed along with the tech and crypto sectors. Supply chain disruptions and technological setbacks have hurt many startups, combined with fears of high inflation and rising interest rates.

Shares of startups taken to the public by SPAC creators like venture capitalist Chamath Palihapitiya have been battered in the stock market sell-off.


Photo:

Mark Kauzlarich / Bloomberg News

Exchange-traded fund trackers that have consolidated with SPACs are down about 30% on the year, a drop that’s much steeper than the broader market. Some formerly popular stocks like sports betting company DraftKings Inc.

DKNG -0.00%

and personal finance startup SoFi Technologies Inc.

SOFI 2.55%

missed 50% or more. Even shares of companies made public by some of the most popular SPAC creators, such as venture capitalist Chamath Palihapitiya, have fallen.

Those drops have slowed the creation of new SPACs and transaction speeds to a fraction of last year’s record levels. They have also urged some companies that previously agreed to list shares through SPACs, such as savings and investment app Acorns Grow Inc.,

to call off transactions and try to raise private funds instead. The slowdown reflects weakness in the broader market for initial public offerings, which had the weakest start to the years following the success of 2021.

A unique element of the SPAC market is that the creators of established companies typically have two years to find a company to go public, or else they have to pay investors back and lose their loyalty. average $5 million to $10 million they pay to start a company – check companies through attorneys and auditors and review mergers.

Figures from data provider SPAC Research show that because so many SPACs raised money during the frenzy early last year, about 280 people face a deadline in the first quarter of 2023. Current SPAC sales performance levels continue, with analysts estimating that a large percentage of those vacancy checks will not find consolidation. The merger window for many SPACs is closing because it often takes months to find a deal, and many companies that may have previously considered such a merger are now choosing to go private, the bankers said.

The creators of that SPAC and other insiders are now expected to lose $1 billion or more early next year — the so-called “risk capital” they spent setting up the SPAC and can never be regained. (Of course, if the creators do strike deals, they’ll make a lot of money on paper because of the way those deals are structured.)

“It’s a ticking time bomb,” said Matt Simpson, managing partner at Wealthspring Capital and SPAC investor.

Some investors expect many SPACs to go after low-quality public offering companies at inappropriate valuations to avoid possible losses. That possibility, they say, shows the incentive problems inherent in such transactions. Even with that expected boost, analysts say many SPACs won’t find consolidation because there simply aren’t enough companies wanting to complete SPAC deals in a timely manner.

Private companies are flooding into special purpose acquisitions, or SPACs, to bypass the traditional IPO process and go public. The WSJ explains why some critics say investing in these so-called short-testing companies isn’t worth the risk. Illustration: Zoë Soriano / WSJ

The expected losses are a particular aspect of the current stock market sell-off, analysts say, as there is no way to recover funds for SPAC creators who fail to find trades. . Never before have more than 600 companies making seashells raised money with such a limited time to get it up and running.

The recent market crash has triggered some SPAC liquidation and made deal negotiations difficult, bankers said. It also comes as federal regulators are tightening rules about how fact-checking companies conduct business disclosures and projections when taking companies public.

About 90% of companies that completed SPAC mergers during the boom that began in 2020 now trade below SPAC’s original list price, according to SPAC Research.

Also known as a check company, SPAC is a shell company that raises money from outside investors and trades on a stock exchange for the sole purpose of merging with a private company. to release to the public. It usually has two years to make a deal or it has to return the money to investors and lose the money its creator spent setting it up.

Hundreds of SPAC creators from former corporate executives to famous athletes entered the market at its peak, hoping to benefit from the lucrative incentives that come with completion. a deal.

Creators can pay to extend their deadlines, especially when they’re negotiating with a company to go public or have announced but haven’t closed a merger. But observers say it will be a challenge for many SPACs to take companies public in the current market conditions.

“It’s an extraordinary amount of money that will actually be lost,” said John Chachas, co-principal manager at Methuselah Advisors, a boutique investment bank. Previously, he considered giving away some of his money to launch SPAC but decided against it.

Many analysts expect a small group of successful SPAC creators to continue to do mergers while less well-known executives struggle. Earlier this month, Grindr, a connection-focused dating app for LGBT people, unveiled an SPAC merger worth about $2 billion, debt included.

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Meanwhile, many professional investors say their performance has also held up. They often invest in SPACs as an alternative to bonds by buying stock at a low price, then selling if the stock appreciates, cashing out before completing a trade, or getting money back if there isn’t one. any merger is done.

But for many SPAC creators struggling to find consolidation, time is running out.

“Certainly a lot of people jumped into the fray,” said Patrick Galley, an SPAC investor and managing director of RiverNorth Capital Management.

Write letter for Amrith Ramkumar at amrith.ramkumar@wsj.com

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Edmund DeMarche

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