Key barometer of market sentiment shows rising skepticism on blank-check firms
After gaining significant traction among investors in 2020 and continuing to show strength earlier this year, the market for SPACs appears to be losing steam.
Over the period between October 2020 and March 2021, most SPAC deals saw 0% redemptions, according to a report by Axios. But fast forward to July, and redemption rates for the majority of SPAC deals had shot past 50%, with around one quarter suffering redemption rates of 80% or more.
“Redemption rates are very much a barometer of market sentiment,” said Ben Kwasnick, founder of SPAC Research, an investment intelligence provider that focuses exclusively on blank-check companies.
A high rate of redemption reflects low investor confidence in a particular deal; rather than risk taking losses if the SPAC’s stock price dives, investors may choose to pull their money early. The more prevalent redemptions are across the SPAC industry, the more likely it is that the behaviour reflects a negative view of the industry and not just a specific blank-check firm.
“We’re digesting a really long period of over-exuberance, and there’s an oversupply in the market,” Kwasnick said, noting that demand for SPAC IPOs has decreased.
According to Axios, the weakened demand for SPAC deals has resulted in more sponsors soliciting anchor investors for their IPOs, often sweetening the pot with more favourable terms and throwing in some of their own founder shares. One industry insider told Axios that anchor investors are usually willing to buy 10% of a SPAC IPO if the sponsors are able to bring the implied cost basis down to $9.50 for them.
As more SPAC stocks sink below their IPO lows, the dynamics of participating in PIPE (private investment in public equity) deals within the space have also become less appealing.
While being part of a PIPE meant practically guaranteed gains during the boom, when SPAC common shares traded above their IPO price, that’s not the case today. SPAC Research data showed the ratio of PIPE size to a deal’s minimum cash requirements stood at 100% as of February, but had gone down to 60% by July.
