October Flash SPAC Update- SPACs: Trick or Treat?
As we close out one of the most beautiful New England Septembers of my lifetime, the SPAC heartbeat has slowed, but has not stopped. In September, the 127 closed tech SPACs hit a new low: down 13%. They have fallen well behind the Renaissance IPO Index and the S&P 500, which are up 21% and 30% respectively in the last year. Not surprisingly, revenue multiples are also coming down with Q3 closing out at 10.6x, the lowest we have seen in six quarters. The PIPE investors, the final decision makers on a deal, are starting to do their job.
Announced tech SPAC deals, which peaked at 36 in February, dropped to 8 in September. Those 8 deals, with an average EV to SPAC leverage ratio of 11x, represented $35B in deal value. Interestingly, 5 of the 8 were pre-revenue, and 42% of deals announced in Q3 ’21 involved a pre-revenue company. SPACs are evidently struggling to find real established tech companies to acquire and are reaching for pre-revenue concept plays. On the other three deals, one was over $350M in revenue, and two were in the range of $90-180M. The median multiple on the three deals with revenue was 8.8x.
Closed deals dropped to 14 from a peak of 23 in July, which is odd because 20 deals closed four months prior, indicating that deals are taking longer to close than the standard 4 months. Completed IPOs and filings were 22 and 18, respectively, continuing a trend of stabilization after spiking to unsustainable levels in the first quarter. 2021 SPAC M&A annualized is tracking at $572B, not far off from the rest of the tech M&A market at $784B. At $102B annualized, SPAC IPOs have surpassed the rest of the tech IPO market at $99B. There have now been 214 closed and announced tech SPACs since the beginning of 2020 with $566B in deal value. Tech SPAC IPOs and Pre-IPOs still seeking targets are at 423 with a buying power of $782B. It is not clear if most, or even half, of that buying power will ever be spent.
IPO investors and PIPE investors have become more discriminating on the SPAC market and as such, are becoming more demanding of it. Fewer tech companies want to sell into SPACs and it is harder to penetrate the traditional hot pedigree SaaS companies with recurring revenues. For early or pre-revenue companies, SPACs are still an attractive option, but high redemptions are compromising those deals and leaving them with inadequate cash and tiny stock float.
SPAC investors are clearly willing to look past rising redemptions, poor after market performance and rich sponsor incentives in their quest for high growth rate companies and the massive TAMs that these SPACs are promising. SPAC incentive structures for sponsors and IPO investors are holding strong for the time being. I predict that SPAC buyers will start to reach down market to smaller market cap companies where there is ample hunting with more growth and opportunity.