Spac kings lose their touch
Of 11 deals completed last year by prolific sponsors only one added value
Companies that went public via Spac deals spearheaded by tech investor Chamath Palihapitiya lost more value in 2021 than those of other high-profile Spac sponsors and the average blank cheque deal, Financial Times analysis shows.
Special purpose acquisition companies have boomed in popularity, attracting interest from bankers and investors to entertainment and sports stars.
Spacs raise money and list on the market as a cash shell before hunting for a private company to merge with and take public. Despite buoyant equity markets and the flood of available capital, the investment vehicles have offered weak returns to shareholders over the past 12 months, while often earning huge payouts for their sponsors.
Of 199 Spac mergers completed last year after a record flurry of issuance, share prices have slumped 40 per cent on average according to FT analysis of data from Spac Research.
The study of mergers completed by five prolific Spac sponsors last year shows that shares in Palihapitiya’s two deals — healthcare group Clover Health and fintech start-up Social Finance — fell the most, by 56 per cent on average.
By contrast, the benchmark S&P 500 index finished the year up 27 per cent.
“Spacs tend to lose money over one to two years after they merge,” said Michael Klausner, a professor at Stanford Law School. “It seems to be a gradual process of post-merger declines.”
Palihapitiya has set up multiple blank cheque vehicles since they surged in popularity, launching 10 Spacs and announcing five acquisitions, the most recent of which was disclosed this week and came after the investor sparked outrage for saying “nobody cares” about the Uyghurs in China.
Spac mergers by other high-profile sponsors also performed poorly, including the two deals struck in 2021 overseen by Howard Lutnick, chief executive of broker Cantor Fitzgerald. SoftBank-backed glass manufacturer View and car sensor maker AudioEye both merged with Cantor Fitzgerald Spacs last year and shares in the two companies have since slumped more than 50 per cent on average.
Representatives for Palihapitiya and Lutnick did not respond to requests for comment.
“There is a difference between some people who have just [issued Spacs] a whole bunch of times because they figured out how this works and they can just rinse and repeat over and over again . . . versus repeat sponsors who are more thoughtful about the target selection,” said Kyle Harris, partner at Cleary Gottlieb.
The enthusiasm for blank cheque vehicles has subsided significantly in recent months amid increasing regulatory scrutiny. Investors have been withdrawing cash at ever higher rates while the crucial Pipe financing market has dried up, forcing investors to seek more expensive forms of funding.
Of the 199 Spac mergers executed last year, nine in 10 are trading below their initial $10 share price and just 15 are trading in positive territory after merging with another business. Only eight have outperformed the S&P 500. Healthcare mergers completed last year were among the worst performing, falling by 49 per cent on average among the 44 spac deals concluded in 2021.
The best performer was British quantum encryption company Arqit, whose shares have doubled since its deal with Centricus Acquisition Corp, followed by electric vehicle company Lucid Motors which merged with Churchill Capital Corp IV in February — one of eight Spacs run by former Citigroup banker Michael Klein.
Of the five prolific Spac sponsors analysed by the FT, deals done by Klein’s Spacs performed the best. They returned 15.8 per cent on average largely thanks to Lucid Motors, whose shares have surged 75 per cent since it was brought to market and despite an SEC investigation.
While providing mixed returns for investors, Spac sponsors can make millions from the deals. They are paid in the form of founder shares called “promotes”, which typically involves them taking 20 per cent of the Spac’s equity for a nominal price of $25,000. When the Spac completes a merger, the sponsor’s deeply discounted shares convert into a smaller portion of equity.
The Lucid deal and the merger of online education company Skillsoft with Churchill Capital Corp I netted Klein $690m, while Palihapitiya has made $408m from the promotes of his two Spac deals last year, according to Spac Research data.
“From the perspective of pretty much everyone but the sponsor . . . it’s a less attractive product if you feel like there’s not going to be a good return,” said one M&A lawyer