September Flash SPAC Update: SPACs Struggle Delivering on Projections

Dear friends and colleagues:

As the U.S. takes a beating from hurricanes Henri and Ida, the Delta variant, and Afghanistan, tech SPACs power on as a major force on Wall Street and throughout the capital markets. Over the course of 2020 and 2021, there have been 206 SPAC acquisitions of tech companies with a combined $530B in deal value. Sponsors and private selling shareholders are highly motivated to transact and take advantage of the insane public market valuations, while traditional institutional investors are desperate for large positions in presumed fast-growing private companies.

The lure of 40% growth and PE-like returns has helped amass $140B in tech SPAC IPO proceeds in just two years. These are gargantuan IPO numbers when you consider that the entire tech IPO market generated roughly $20B/year in IPO proceeds over the previous ten years. Tech SPAC M&A is also massive at $600B/year in deal value. Quarter to date, 37% of announced deals are pre-revenue concept plays, with Auto Tech, Clean Tech, and Mobility Tech being the most popular.

There are around 40 solid performers among these 206 deals, but the others have mostly underperformed, with a median return since IPO of -8% among the 112 that have completed deals. Meanwhile, the S&P 500 and the IPO Index are up 42% and 78% respectively since June 1, 2020. Typically you would get a premium to the market for betting on IPO stocks (which has happened with traditional IPOs over the past three years), but the SPAC market has woefully underperformed on that expectation. In fact, 53 newly public SPACs have recently reported earnings for the quarter ending 6/30/21, and 37 of them are trading down since their earnings call in the hottest stock market in history.

Closed deals are holding a steady pace of 20 per month, while announced deals dropped dramatically in August after picking up from April to July. Completed IPOs have been on a steady build since the freeze-out in April with 20 completed in August, and new filings have remained consistent in the high teens per month. M&A by these newly public companies will continue to build. Valuations, which peaked at 14x revenues in Q2, appear to have flattened out in Q3. PE-backed SPACs are many, but most of them have not yet converted to an announced acquisition, so it is not clear whether that trend will power on.

There is lots more to talk about, but that’s all for now. Have a great Labor Day with family and friends without the drama of an oncoming hurricane. ☺