The Crash of SPACs in 2023: 40% of IPOs Fail to Find a Target
The Bursting of the Bubble
Financial Services Industry: Focus on Strategic Asset Management and Investment Deals
Paul Clarke - Dec 20, 2023
Special Purpose Acquisition Companies (SPACs) stumbled in 2023, with a staggering 40% of Initial Public Offerings (IPOs) failing to secure a target. Here's a breakdown of the key factors behind this mishap:
Regulatory Ripples:- SEC Overwatch: The Securities and Exchange Commission (SEC) stepped up its watchful eye on SPACs, demanding more transparency in forward-looking projections and sponsor compensation.- Legal Liabilities: Emerging SEC rules (effective in 2024 but affecting 2023 decisions) held sponsors accountable for misleading projections, dissuading subpar deals.- Tightened Accounting Standards: Stricter rules for revenue recognition made it challenging for pre-revenue targets to qualify for SPAC mergers.
Troubling Market Conditions:- Rising Rates: Higher borrowing costs dampened investor enthusiasm towards speculative assets, such as SPACs.- Upheaval in the Equity Market: SPACs often court growth sectors, which suffered due to uncertainties in 2023.- Redemption Wave: Investors increasingly cashed out their shares before mergers due to the poor quality of targets, leaving SPACs undersupplied.
Inner Struggles Within SPACs:- Sponsor Dilution: SPAC sponsors claimed 20% founder shares, reducing returns for public investors.- Misaligned Incentives: The "promote" structure motivated sponsors to finalize any deal, even if it was weak, to collect fees.- Deadline Strain: SPACs ventured from 2021 faced pressures to meet 24-month deadlines, often leading to hasty acquisitions.
Target Scarcity:- Delusion of Quality: The 2020-2021 SPAC boom drained the pool of viable private companies willing to merge via SPAC.- Reputation Stain: High-profile disasters, like WeWork and EV startups, tarnished SPACs' appeal for strong targets.
Disenchanted Investor Pool:- Retail Rejection: Post-2021 SPAC crash, retail investors steered clear of the sector, leaving fewer buyers to back post-merger stocks.- Institutional Wariness: Fund managers scrutinized SPACs more diligently due to poor historical returns (around 60% of SPACs from 2019 to 2022 struggled to reach $2 by 2023).
This entanglement of factors conspired to cause a tumultuous year for SPACs, leaving many investors reeling from the aftershocks.
- Paul Clarke warned about the tumultuous year for SPACs in 2023, as 40% of Initial Public Offerings (IPOs) failed to find a target, due to strict regulatory oversight, troublesome market conditions, inner struggles within SPACs, and target scarcity.
- Rising regulatory scrutiny played a significant role in the failure of SPACs, with the Securities and Exchange Commission (SEC) demanding more transparency, new rules on misleading projections, and stricter accounting standards.
- Investors in 2023 were less enthusiastic about SPACs due to factors such as higher borrowing costs, uncertainties in growth sectors, redemption waves, and a disenchanted investor pool.
- As a result of these factors, many investors were left reeling from the aftershocks of the 2023 SPAC crash, causing a decrease in interest from both retail investors and institutional investors, leading to a challenging environment for SPACs in the future.
