Wall Street's Spac gravy train hits the buffers

Spacs have attracted participation from A-list names, including tennis star Serena Williams. Photo / AP

The fees US banks earn from special purpose acquisition companies have plunged in the past two months, disrupting what had been a main profit generator on Wall Street.

Investment banks made a little over US$430 million ($592.4m) from initial public offerings of Spacs and mergers between Spacs and private companies in April and May, according to data from Refinitiv. That accounted for 4.5 per cent of overall investment banking fees for the period.

By comparison, in January and February, Spacs accounted for 22.5 per cent of revenues and brought banks almost US$3 billion in fees — the two most active months ever for the sector.

Spacs raise money in an IPO and then hunt for an operating business to acquire. They became one of the most popular investment vehicles on Wall Street last year, attracting participation from the likes of Bill Ackman, Serena Williams and Alex Rodriguez.

Investor enthusiasm has waned, however, following lacklustre share price performances after recent deals and a newly sceptical approach on the part of US regulators, which have questioned Spacs' accounting standards and forecasts for future earnings.

As a result of the slowdown, fees now lag behind the rate seen in the second half of 2020, when Spac work generated around 10 per cent of total earnings. Current levels are closer to those typical for Spacs prior to mid-2020.

"Year-to-date volumes in the Spac IPO market through April 2021 exceeded the Spac IPO volumes in all of 2020, which had dwarfed 2019 volumes, so it is somewhat understandable that it is taking time for the market to absorb all of these deals," said Mark Brod, a partner at Simpson Thacher.

In April and May, there were only 30 US Spac IPOs, compared with 299 in the first quarter, Refinitiv data showed. In the same two months, 32 Spacs agreed mergers, compared with 84 in the first three months of 2020.

There are still 422 Spacs that have raised a combined US$134.4b currently searching for a company with which to merge, according to industry tracker Spac Research.

Spacs typically have around two years to agree an acquisition and the deal slowdown has quickly fed through to the IPO market. Some specialist investors, usually hedge funds, buy into Spac IPOs and sell after a merger is announced, so delays caused by the extra regulatory scrutiny have kept money tied up that would otherwise be used to back new offerings. The leverage available for that trade has also been cut.

Share prices are not typically rising as much after deal announcements now, either, further limiting the money that can be recycled.

Six Spacs announced deals last week, according to Spac Research data, including for savings start-up Acorns and Tritium, a maker of chargers for electric vehicles. Shares of all six are trading below their IPO level.

Some bankers remain hopeful of a rebound, particularly if the wider pullback in technology sector valuations reverses.

"In mid-February . . . investors were seeing a lot of alpha in the Spac market. Now the merger index has retraced," said Paul Abrahimzadeh, co-head of North America equity capital markets at Citi, which has worked on more Spac IPOs this year than any other bank.

"That can change quickly depending on secondary market valuations in the sectors where Spac merger activity is most pronounced."

Written by: Joshua Franklin and James Fontanella-Khan

© Financial Times