Investment

Family offices continue to pile into the SPAC market, but should they exercise more caution?

The SPAC (special purpose acquisition company) market is booming like few others, and family offices and their principals are fueling that boom. But the market looks increasingly frothy. Family offices might be wise to proceed with caution. 

Since the beginning of the year, 104 SPACs have been priced for an initial public offering, raising $30.1 billion from investors in the process, according to SPACInsider, an industry web-based newsletter. Those numbers compare with 243 priced for IPOs for the whole of 2020, raising $80.3 billion in total 

Family Capital reckons that around one-third of new SPACs have some form of direct involvement in a SPAC…

So, already this year SPAC numbers are 42% of last year’s total, and the funding they’ve raised is 37% of the entire amount raised in the previous year. That’s explosive growth, particularly as last year’s figures represent near exponential growth on the year before – 243 launched, compared with 59. 

SPACs now comprise more than 60% of all IPOs in the US, compared with around 20% at the beginning of 2020. Clearly, one of the hottest parts of finance and deal-making right now are SPACs. Tech ventures love them because they can raise capital quickly, with minimal intrusion, compared to IPOs.  

Number of SPAC IPO Transactions Source: SPACInsider

Family offices are driving a lot of that activity. Family Capital reckons that around one-third of new SPACs have some form of direct involvement from a family office, whereby either they have backed the sponsor, and/or senior managers at a family office are part of the management team of a blank-check company. 

Some recent examples of direct involvement include McLarty Companies, a family office led by Thomas F. McLarty, III, which is backing MDH Acquisition Corp; Greg Wasson, and his family office Wasson Enterprise backing Twelve Seas Investment Company, also supported by Neil Richardson and his family office, North Sea Capital. 

More Europeans are also getting into the act. Last week, Family Capital detailed a group of European investors and their family offices sponsoring Constellation Acquisition Corp. The SPAC boom is going global, although pretty much all the SPAC listings are in the US, as other markets remain less enthusiastic.  

Those backing SPACs would probably argue the risk of the market taking a serious hit is dependant on the performance of the US stock market. If the S&P 500 tanks then SPACs will tank at the same magnitude. By looking at the surge in SPAC launches so far this year, investors don’t seem too concerned.

Alternatively, sceptics might say they are foolishly rushing into an already overheating market, with the S&P500 trading at more than 21 times next year earning projections. 

One thing is for sure: the SPAC market is more volatile than the S&P500 index as the below chart illustrates. The blue line being the S&P500 and the two other lines a market cap and an equal weight index of SPAC performance since July 2020. Yes, SPACs look to be outperforming the S&P500, but with far more volatility.

That volatility might suggest when the market cools, SPACs will be the coldest part of it. It is a painful fact that when you lose a large amount of money on an investment, you are left with a lot less capital to make the loss back. Which is why hedge fund investors pay a great deal of attention to this kind of drawdown risk. 

Source: SPACInsider

And the SPAC markets hasn’t gone unnoticed by the regulator, with the Securities and Exchange Commission last year saying it was looking into blank-check ownership disclosures among other areas of concern. There are questions concerning the due diligence carried out by some SPAC deals. The Biden administration could well come down more heavily on overheated capital markets, especially after the appointment of Gary Gensler, former chairman of the Commodity Futures Trading Commission, as the new head of the SEC.

Also, unlike traditional IPOs, SPACs need companies to merge with and the more SPACs there are – there are already around 300 seeking deals – the more competition there will be to seek out the best companies to merge with. That will push up the valuations of target companies and inevitably stoke further the already overheated SPAC market. Someone could end up buying the wrong kind of company, increasing the pressure for tougher regulation. 

With most of the companies SPACs looking to do deals with in the tech sector, what’s happening in Silicon Valley will give the first signal of the SPAC market’s health. But so far venture investment continues apace, with $1.2 billion raised just by New York City-based startups in January. And our weekly deal monitor of family offices investments continue to show strong enthusiasm for venture investing. 

SPAC enthusiasts have good reason to remain bullish, but the market can’t keep growing at such a spectacular fashion forever…can it?  

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