After a series of rollercoaster years for the SPAC market, investors and sponsors are finding ways to improve deal integrity
SPACs have never faced such a challenging environment, for a number of reasons. The overhang of the SEC’s proposed regulations regarding misleading financial projections have had a significant ripple effect. It is now extremely difficult to find banks willing to engage after they pulled back from the market almost overnight in late March. This has delayed deals as accountants come to terms with what information is required to be disclosed, and legal counsel now takes longer too. The due diligence bar has been set that much higher before a de-SPAC deal can be announced, stalling activity.
That’s the regulatory angle. Then there is the lack of risk appetite for these deals. There have been high levels of redemptions from retail investors once deal targets have been announced. Part of that is a function of the wider shift from high-growth risk assets with a distinct tech flavor, a favorite of SPACs, in favor of stable earners and commodities plays amid the economic slowdown and attendant bear market.
A number of high-profile SPAC deals have also fallen far short of expectations, which is what has prompted the SEC’s greater scrutiny. This means sponsors need more PIPE capital, which has been similarly unforthcoming, from institutional investors to close their deals.
Bottoming out
However, the worst has possibly already passed for the SPAC market. Sponsors and banks have adopted a more cautious sentiment over the past three months since the SEC announced its proposal, but stakeholders are quickly adjusting.
One of the most exciting recent developments in the SPAC space is the deal innovation. A case in point, in July, FAST Acquisition Corp. II entered into an agreement to combine with Falcon’s Beyond, an entertainment development company specializing in intellectual property creation and expansion, in a de-SPAC transaction with a pro forma enterprise value of US$1 billion. The deal is noteworthy for introducing a unique structure whereby shareholders who do not redeem their shares will receive 50 percent of their shares as convertible preferred equity with a sizable 8 percent dividend and US$11 conversion price and 50 percent common stock. What’s more, 20 percent of the founder shares held by FAST II’s sponsor were forfeited and contributed to a bonus pool allocated to non-redeeming shareholders and PIPE investors, disincentivizing the deal’s abandonment.
This is just one example of how investors and sponsors have an abundance of options to improve the integrity of deals and ensure that they cross the finish line. Once the stock market finds its bottom and when there is greater regulatory clarity from the SEC, SPAC IPOs and de-SPAC activity should be in line for a recovery. It’s unlikely that the frenzy of Q1 2021 will be repeated, but there will be plenty of headroom for the US SPAC market’s growth as the interest rate cycle nears its end.
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