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The sense of reality was starting to bite when the financiers behind one of the big market booms of recent years gathered last month for the annual investors conference of the Wall Street Robin Hood Foundation charity.
Robin Hood has chosen Jay-Z, the rapper whose songs include I can’t hit the hustle and bustle. But some at a conference panel on so-called Special Purpose Acquisition Vehicles seemed ready to acknowledge that the game had changed.
For over a year now, Spacs has been in tears. Blank check companies raised some $ 180 billion in the year through July, according to data from Refinitiv, and have become a driving force in two crucial market segments – initial public offerings and mergers. and acquisitions.
But now, regulators are moving closer to the market, causing activity to drop sharply and a large loss this week. Funds raised by U.S. company Spacs fell to just $ 3 billion in April, from $ 35 billion in March, as the number of new vehicles fell from 109 to 13.
As one of Spac’s most prominent bankers said at Robin Hood’s private lecture, it was “an epic party followed by an epic hangover.” The banker should know – it’s Niron Stabinksy of Credit Suisse, who earned the nickname “Mr Spac” for his longevity in the market.
Spacs, which raises money from investors through a public listing and uses that money to find a private company to then go public, has transformed the IPO markets. They have offered a fast track to market for companies in fields as diverse as flying taxi company Joby Aviation to space tourism company Virgin Galactic of Richard Branson. Jay-Z himself has teamed up with a Spac called Subversive Capital Acquisition which has struck a deal to take two cannabis companies public.
Goldman Sachs estimates that there are still 400 US Spacs with $ 118 billion in cash looking for deals.
But they now face a stricter regulatory environment with the new administration in Washington. Gary Gensler, the new head of the Securities and Exchange Commission, has made no secret of his desire to curb the Spac frenzy and ensure investors receive accurate information.
SEC officials have already issued warnings on the disproportionate advantages that those who support a Spac, called sponsors, receive for having put little skin in the game. informed investors not to invest in a Spac just because a celebrity is involved.
Perhaps the most effective SEC move has been an opinion that many Spacs have had to change the way they account for warrants, a key feature that rewards early investors with a cheap option to buy shares in the merged company. The regulator said warrants had in some cases been misclassified as equity when they should be viewed as liabilities, hampering listings.
Another sign of regulatory intent came this week with a blow to a Spac backed by billionaire hedge fund manager Bill Ackman. The investor said the Wall Street watchdog “put a dagger at the heart” of the deal to acquire a 10% stake in Universal Music through its Spac, Pershing Square Tontine Holdings.
Ackman said the SEC landed the ultimate “deal killer” by saying the deal violated the rules of the New York Stock Exchange, where its Spac is listed.
The problem was a complicated structure that Ackman and his advisers had devised to solve one of the main challenges facing his shell company – at $ 4 billion, it had too much cash and too few goals to hit. . After spending $ 4 billion on Universal’s stake, Ackman’s hedge fund Pershing Square would replenish Spac’s liquidity, adding $ 1.6 billion to find a company to go public. Investors were also given the option to purchase another trade through a newly formed entity that did not need cash initially. After the SEC moved, Ackman canceled the deal.
Pershing Square will now acquire a $ 2 billion stake in Universal, the music group with the option to purchase the remaining half by September. People familiar with the transaction say it will be funded through a co-investment vehicle.
Elsewhere, the securities regulator recently brought back to earth the ambitions of space transport start-up Momentus to become a publicly traded company. He fined the company as well as the acquisition of Stable Road, the Spac with which he struck a deal at a valuation of $ 1.2 billion, to mislead investors.
High-profile electric vehicle companies, including rivals Nikola and Lordstown Motors, are also under investigation by the SEC. And retail investors also seem to be getting tired of Spacs.
The ensuing slowdown was hailed by critics. It might even be a slight relief for the bankers and exhausted lawyers who were inundated with Spacs contracts as the craze peaked.
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