Awful SPAC Returns Mean More Frustration for Blank-Check Firms

(Bloomberg) -- The SPAC market offered investors only disappointment last quarter, but it may seem like the good old days as regulators crack down on new blank-check stocks and enthusiasm for existing ones wanes.

The IPOX SPAC Index fell 9.5%, the worst performance since its July 2020 launch, and has lost more than 22% over the past three quarters. There are 610 special-purpose acquisition companies hunting for deals or racing the clock to find one, and some existing transactions are falling apart. SPAC warrants, which hold the promise of future windfalls, are trading at a fraction of year-earlier levels.

Heavyweight sponsors are pulling plans for new offerings. And that was before the Securities and Exchange Commission laid out plans for new rules Wednesday, putting the industry on notice that the era of bringing private companies public with overly rosy forecasts is over.

“Irrespective of these new SEC proposals, the SPAC market has really been retrenching,” said Jay Ritter, a University of Florida professor who tracks new issues. “We've had 54 SPAC IPOs this quarter, and I'd be shocked if any of the quarters for the remainder of the year hit that level.”

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It's no wonder: The SPACs that are still empty-handed are trading for less than the cash they have in trust. And returns for the SPACs that did complete a merger are horrific, with declines of 27% in the first quarter and 65% from the 2021 high.

“The bottom is not in yet, because you have too many SPACs chasing too few deals; that has got to resolve itself,” said Matthew Tuttle, chief executive officer of Tuttle Capital Management, which runs an index that tracks SPAC returns. If the SEC equalizes the playing field between traditional initial public offerings and SPACs, “it could be a lot harder for the crummiest of the crummy deals to happen.”

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Here is what's happening across the industry as it has quickly gone from a boom to a bust:

Heavyweights Bowing Out

Dealmakers pulled the plug on a record 44 planned SPAC listings in the past three months that would have raised $11.66 billion, data compiled by Bloomberg show. A range of blank-check firms backed by household names like Wall Street veteran Ken Moelis and those with celebrities attached including a SPAC that counted former New York Giants quarterback Eli Manning as an adviser, were among those to throw in the towel.

Deal Breaks

Aborted SPAC mergers reached a record high of 15 in the first quarter and more than 30 for the past year, according to data compiled by Chicago-based SPAC Research. In part, that's because the deals were negotiated when prospects for SPACs and the macro outlook were brighter. SPACs and their targets that have called it quits on their tie-ups range from Carlyle Group Inc.-backed Syniverse Technologies LLC to investing app Acorns Grow Inc.

Warrants Spiral

Investors have dumped warrants issued by all types of SPACs, with the prices down more than two-thirds from a year ago, data compiled by Boardroom Alpha shows. The downward spiral signals that investors don't expect SPACs to find any target or that they won't find a partner that boosts their shares enough to make the warrants valuable. Pre-deal warrants are trading at 33 cents on average compared with 67 cents at the start of the year, while warrants tied to firms that have lined up deals are around 75 cents versus $1.13 at the end of 2021.

Pulling Cash Out

Blank-check stockholders are allowed to pull out by redeeming their shares if they don't like the merger partner the SPAC chooses -- and they're doing it with abandon. The average redemption rate for the quarter was above 80%, the most in the past year and a stark contrast to the 4% rate in March 2021, data from Boardroom Alpha show. A record eight de-SPACs have suffered redemption rates above 95% this year, up from just two for all of last year, Boardroom Alpha data show.