Investment

Family offices and their principals helped create the SPAC boom – now that boom is over and some are suffering

We saw peak SPAC when prices stopped hitting a premium on their first day of trading, as Family Capital reported on 22 April, 2021.

Since then, the going has become tough, with ex-SPACs falling 70% from their high point in February 2021. In aggregate they have fallen 40% in 12 months, against a 10% fall in the Nasdaq tech index. Some are down 70% or 80%.

Unfortunately, several family businesses and offices have been caught up in the carnage

According to Spac Insider, 62 SPAC transactions have raised a mere $10.8 million in the year to date, against 613 raising $162.5 billion in 2021. Six hundred SPACs are desperately seeking targets before they expire.

“Everything was going to the moon, and now SPAC is a curse word,” says Enrique Abeyta of Empire Financial Research. 

But SPACs continue to offer entrepreneurs easy access to cash, share listings and networking opportunities. And family offices remain interested in sponsoring the right deal, where they can expect up to 20% of the action, for little outlay, and (hopefully) pricing which reflects reality. 

Several family offices are backing travel software firm Mondee in a $1 billion merger with a SPAC led by hospitality tycoon Orestes Fintiklis. The Pinault family is backing a SPAC deal proposed by French music streaming outfit Deezer.

SPAC king Chamath Palihapitiya has listed more shells, with one involved in a $1 billion merger with Akili, which believes video games can treat hyperactive children.

Lex van Dam, founder of the SFO Alliance network, is no fan of the fees SPACs have charged over the years. But he does see value in several ex-SPACs which have suffered a price plunge: “Markets have a surprisingly short memory and a lot of the current negative news has been priced in.”

Unfortunately, several family businesses and offices have been caught up in the carnage. Viscount Rothermere’s DMGT has seen shares in motor dealer Cazoo fall 83% following a SPAC deal backed by Willoughby Capital, Danny Och’s family office. 

Clover Health, a provider of US health plans, backed by Chamath Palihapitiya, is 70% below par. It is one of  54 SPACs currently caught up in class-action lawsuits.

Hippo Insurance earned VC backing from several families, including clients of Iconiq Capital but its shares are 82% below par along with similar stocks. According to one analyst: “Insurtech companies perhaps went public before they could predict their growth well enough.”

Electric truck company, Nikola, backed by Fidelity, saw its SPAC trade at a premium of 560% in 2020 when it was a rarity. Missed targets and management problems have left it on a discount of 30% and relying on junk bond finance at 11%. 

Anthony Tan’s Grab Holding, once a poster child for Asian ride-hailing, maintained a 29% prior to listing, but now they sit on a 70% discount

What’s gone wrong?  

A big problem is that rising interest rates crucify long-term forecasts. Markets have become volatile, increasing the appeal of macro trading strategies, at the expense of venture capital. 

SPAC sponsors liked putting cash to work for a 20% “promote” stake in enlarged companies. But 20% of a company whose shares fail to perform is not appealing. Sponsors also face the risk of criticism over the arrangement, particularly if companies go wrong. 

The SEC doesn’t particularly like SPACs, partly because they can lead to rushed deals. It wants to put them on a level playing field with initial public offerings by preventing earnings projections and improving disclosures

The regulators are particularly leery of the quality of earnings forecasts often stretched to justify previous VC funding rounds. In 2021, Goldman Sachs noted that SPACs consistently lagged the index following a float, as investors start to focus on the next set of earnings and fear the worst.

Validation of a launch price is provided through a private investment in SPAC public equity (PIPE) by professional investors, to top up its working capital.

But Betsy Cohen, a SPAC entrepreneur, has warned that PIPEs are now often led by the same firm as a sponsor. She fears that a reduction of price validation may undermine faith in the sector and lead to the failure of 30% of transactions. 

Betsy Cohen has led nine SPACs but none in the last year. She aborted a deal with tech services firm Pico in February. 

But she says SPACs continue to offer sponsors and targets an attractive package. 

Several deals have popped up in the environmental sector. NuScale Power, a maker of small power plants, achieved a premium this week; CH-Auto, a Chinese electric car company is pursuing a SPAC deal, along with Giga Carbon Neutrality, a clean energy transport specialist. 

Jerry Tang’s VCV Digital Web3 crypto miner is negotiating a SPAC deal, as is SeaStar Medical, a specialist in inflammation. 

None of these collectively amount to the avalanche of SPAC sector deals we saw in 2021. But reports of its death are, as yet, greatly exaggerated.

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