Other SPACs should be liquidated. They can always offer payment.

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Bill Acman.

Christopher Goodney/Bloomberg

Two years ago, special purpose acquisition companies exploded in the IPO market as equity offerings warmed up after being cold at the start of the pandemic. Today, trading volume is down almost 90% and many SPACs launched in 2020 may have to return their money to investors.

SPACs, or blank check companies, raise money in an initial public offering with the goal of finding a private company that could take off if it had more capital and merge with it. The money raised from the IPO remains in an interest-earning trust until a merger is completed and the money becomes available to fund growth.

The problem — an opportunity in many cases — is that SPACs typically have two years to find a partner and close a merger, or risk having to pay back investors. Those timelines loom for the so-called SPAC class of 2020, the 248 blank check companies that listed stocks that year, enjoying a wave of euphoria as investors sought to invest in growth.

More than a thousand companies went public in 2021, including a record 613 SPACs. But general problems, including a falling stock market, the war in Ukraine, inflation and fears of recession, have put a damper on IPOs this year. Only 70 blank check companies have launched so far in 2022, while traditional offerings have slowed.

The returns for the SPAC class of 2020 aren’t great. More than 150 blank check companies that year found and closed mergers, analysis shows Barrons indicates, but only 7% of them are trading above their $10 offer prices, according to Renaissance Capital, which provides IPO research. The Renaissance Capital IPO ETF, which invests in companies that have gone public within the past three years, is down 44% so far this year.

Eighty-four, or 34%, of the 248 SPACs in 2020 have yet to complete a merger. The figure includes 56 SPACs that have not announced deals and 28 whose mergers are in the works, according to Barrons analysis. Some of Wall Street’s biggest names, including Bill Ackman’s $4 billion Pershing Square Tontine Holdings (ticker: PSTH) and two SPACs backed by venture capitalist Chamath Palihapitiya, have yet to complete any deals.

Pershing Square

Tontine is due to close a transaction on July 24, although this could be extended until January 24, 2023. Palihapitiya’s two SPACs, the $1.15 billion Social Capital Hedosophia VI (IPOF) and Social Capital Hedosophia IV ( IPOD) of $460 million, have until October 14 to complete transactions. Pershing Square and Social Capital each declined to comment.

Liquidations among the SPACs of the class of 2020 have jumped. According Barrons The data. That compares to two blank check company liquidations that were launched in 2019, two from 2018 and three from 2017, according to SPAC Research, which tracks the industry. No SPAC launched in 2021 has sought to liquidate.

Mitchell Nussbaum, a partner at law firm Loeb & Loeb who has advised SPACs for more than 20 years, expects others to be liquidated due to the volume of blank check companies that have gone public recently. He highlighted the 248 SPACs that listed their shares in 2020, a 76% increase from the 59 that went public the previous year.

Liquidations “will increase by a corresponding amount,” Nussbaum predicted,

Evan Ratner, chairman of Levin Capital Strategies, a New York-based fund management firm that has invested in SPACs, also expects more blank check companies to be liquidated. “Most sponsors will have to do the math of losing venture capital versus getting a bad deal,” he said.

Matt Kennedy, senior IPO strategist at Renaissance Capital, said the majority of SPAC’s Class of 2020 liquidations are expected to occur in the fourth quarter. “However, we could see a number of sell-offs in the third quarter, particularly if ongoing mergers are undone,” Kennedy said.

Loeb’s Nussbaum, however, doesn’t expect more than 20% of SPACs to end up being liquidated, as companies with blank checks can usually extend their merger deadlines until they find a suitable target. . For example,

Greencity acquisition company
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has extended its deadline to reach a deal at least 10 times and now has until Oct. 28 to finalize a merger, according to a filing with the Securities and Exchange Commission. Greencity did not respond to messages seeking comment.

SPAC liquidations aren’t necessarily a bad deal for shareholders, Nussbaum said, because companies must repay shareholders at the offering price, typically around $10 per share or more, even if a shareholder bought the stock. at a lower price, he said. “It’s okay if everyone doesn’t make a deal, because the public gets a full return on their investment in that case,” Nussbaum said.

The vast majority of 2020 SPACs are trading below their offer prices. SPAC liquidations “can provide a decent return,” Levin’s Ratner said. “It was much more attractive before rates skyrocketed,” increasing payouts available on fixed income investments.

More SPACs are expected to forgo finding merger partners as competition for deals is intense. According to data from SPAC Research, about 600 blank check companies, totaling $161.5 billion in trusts, are looking for companies to merge with. “Not everyone will be able to get a deal done,” Nussbaum said of Loeb.

Write to Luisa Beltran at [email protected]