A wave of special purpose acquisition company deals helped take the US equity capital and M&A markets to new heights in late 2020 and early 2021, but there are signs the surge is tailing off.
The boom in US equity capital markets and merger and acquisition (M&A) activity in late 2020 and early 2021 was sparked to a large degree by a parallel flurry of special purpose acquisition company (SPAC)-fuelled activity.
There were 248 SPAC initial public offerings (IPOs) in the US in 2020, raising $82.6bn, according to Dealogic data, the highest annual total on record. This total was quickly surpassed in the first quarter of 2021 where a record 298 SPACs listed publicly, raising $96.8bn. Yet just three months later, the picture is very different: as of June 7, just 32 SPACs had listed in the US in the second quarter of 2021.
SPACs, often known as ‘blank-cheque companies’, raise capital via an IPO with the sole purpose of using the funds to acquire another company, often in a specified sector, within two years of the IPO. Because investors do not know in advance what company will be targeted for acquisition, a SPAC will typically have a high-profile sponsor, to lend credibility to the entity. SPACs are not a new phenomenon, having been around for decades, but have only really become mainstream since the second half of 2020.
Under SEC scrutiny
However, following a series of announcements and activity from the US Securities and Exchange Commission (SEC) that suggest it is scrutinising this area – including reportedly opening an inquiry into SPACs in late March – the number of SPAC IPOs took a nosedive. There were 109 SPAC IPOs in the US markets in March 2021, but just 13 in April and 19 in May.
The SEC has made clear it has concerns about risk management and investor protection in relation to the SPAC market.
There are some early signs that the much-discussed growth in European SPACs is beginning to emerge
However, given that there are currently around 420 active SPACs in the US markets, with total capital of more than $100bn, looking for a target, the M&A side of the market looks unlikely to be cooling off. In 2020, 90 US M&A deals were SPAC acquisitions, and that activity has risen to total 116 in 2021 so far. February 2021, with 42 SPAC-driven M&A deals, was the busiest month on record for the category.
On the other side of the Atlantic, there are some early signs that the much-discussed growth in European SPACs is beginning to emerge. SPACs have never really taken off in Europe; the highest annual total on record is just 21 deals in 2017, collectively raising $3.98bn. Almost halfway into 2021, at the start of June there had been 14 deals, raising $4.045bn.
European exchanges such as Amsterdam, Paris and Frankfurt have been competing heavily to burnish their SPAC-friendly credentials, while the UK’s recent review of its listings rules also included plans to make the London Stock Exchange more SPAC-friendly. Time will tell if the European markets will pick up the baton from the US.
Continue reading: How to regulate SPACs
