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SPACs are becoming less certain as trading becomes strangers and stocks roll over

The trader is working on the floor of the New York Stock Exchange (NYSE) in New York, USA on January 31, 2018.

Brendan MacDermid | Reuters

Things are strange in the sizzling SPAC market. Leisure SPAC is currently engaged in biotechnology trading, but the cannabis blank check company eventually merged with the space company.

Sponsors are rushing to trade in increasingly crowded spaces as more than 370 US blank-checking companies with capital of over $ 118 billion are looking for matches, according to SPAC Research data. According to the data, nearly 60 SPACs identified merger targets in February alone. This is the largest month in history.

“They are exposing more and more low-quality companies,” said Ross Mayfield, an investment strategy analyst at Baird. “They run into the capabilities of a reasonably quality company, especially in a popular niche.”

Faced with fierce competition, deadline pressure, and volatile markets, some SPACs had to settle on less-ideal goals and, in some cases, threw the entire blueprint out the window. .. And as shareholders scrambled to redeem when the deal turned out to be disappointing, the glowing rise in SPAC shares began to roll over.

Original specifications CNBC SPAC50 IndexTracking up to 50 US-based pre-merger blank-check transactions by market capitalization, has fallen by more than 15% in the last two weeks, wiping out all 2021 profits.The· CNBCSPAC Post Deal IndexConsists of the largest SPACs on the market and announcing their targets, which has fallen by a similar amount and is now down 10% year-on-year.

last month, Leisure Acquisition Corporation.. , SPAC initially targeted leisure companies, as the name implies, and announced a $ 200 million deal with Ensysce Biosciences, a biopharmacy company that fights drug overdose. Stable Road Acquisition Co., Ltd.The cannabis SPAC also fulfills a major point and has signed a contract with the space company Momentus.

One or two cases are not a trend, but given the sheer number of open transactions, there was concern that the quality of SPACs could deteriorate in the future. SPACs also compete with private equity firms, many of which still have a lot of dry powder to deploy.

“There may be transactions with companies that have no transactions or are not necessarily guaranteed to be public companies,” said Sylvia Jabronski, chief investment officer of the Defiance ETF. SPAC ETF (SPAK) In September. “If time goes by and they don’t do it, then energy and investment are now being spent on it, and they could make a bad merger to complete it.”

SPAC stock rollover

Trading in SPACs once seemed to have only been able to rise, but it is possible that many of the acquisitions SPACs have chosen have failed and have begun to be cancelled. Soaring volatility also tends to hurt speculative areas of the market.

Justin Renalsic, Senior Alternative Investment Strategist at Wells Fargo, said:

SPAC stands for Special Purpose Acquisition Company, which raises funds through an initial public offering and uses the cash to merge with a private sector, usually going public within two years. Excited investors piled up in stocks of these empty corporate shells in the hope of hitting a home run.

Some of the hottest deals are being traded Over 40% above IPO price, Including Bill Ackman’s $ 4 billion Persing Square Tonteen Holdings Two of the Chamas Paris Hapitiya SPACs.

“Some people are a little complacent when they hear that SPACs are not risky because they have the ability to redeem interest if they don’t like the deal … but it can only work if they invest. It needs to be understood early on. ” “It really depends on where in the SPAC life cycle you are investing in.”

Many retail investors buy SPACs in the secondary market. This means that you are likely to miss the benefits associated with early pop and warrants in common stock. On the other hand, for buy-and-hold investors who enter only after the deal is closed They almost always lose money.

“Unsustainable”

There are no signs of a slowdown in the issuance of SPACs. According to SPAC Research, the funds raised in the first two months of 2021 are already comparable to capital from the record full year of 2020. That’s $ 68.5 billion to date, compared to $ 83.4 billion last year.

“The ferocious pace of issuance is likely to be unsustainable,” said David Kostin, head of US equity strategy at Goldman Sachs. “SPAC has the potential to generate over $ 700 billion in acquisition activity over the next two years.”

Several recent new publications are frowning on Wall Street. Last month, a SPAC named “Just Another Acquisition Corp.”Submitted to Securities and Exchange Surveillance Commission Raise $ 60 million for transactions in unspecified sectors. There is also “Do It Again Corp.” This week, Delaware-based SPACs have the potential to target restaurants and retail brands. Filing.

“There may be more FOMO elements here,” said Renalsic. “I think you need to be careful. Not all SPACs are created the same, and all sponsors are the same. It is important to understand that not all transactions are the same. Good results. “

— CNBC’s Gina Francola contributed to the report.

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SPACs are becoming less certain as trading becomes strangers and stocks roll over

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