There’s a sense of reality beginning to emerge as the financiers behind one of the biggest market booms in recent years gathered last month for the annual Wall Street investor conference. of the Robin Hood Foundation.
Robin Hood picked Jay-Z, the rapper whose songs include I can’t stop the hustle. But some in the panel on so-called special-purpose shopping vehicles seem willing to admit that the game has changed.
For over a year, Spaces cried. According to Refinitiv data, check companies raised about $180 billion in the year to July and became the driving force in two key market segments: initial public offerings and trading and merger.
But now regulators are shutting down the market, causing activity to plummet and being the main victim of a deal this week. The amount raised by US-listed Spacs fell to just $3 billion in April from $35 billion in March, while the number of new cars dropped to 13 from 109.
As one of Spac’s famous bankers put it on a private board event at the Robin Hood convention, it was “a big party followed by a terrible drunkenness”. Bankers should know: it was Niron Stabinksy of Credit Suisse, who went by the nickname “Mr. Spac” for permanence in the market.
Spacs, the company that raised money from investors through a public listing and used that money to find a private company and then go public, changed the IPO market. They have provided a quick route to marketing for companies in sectors as diverse as the flying taxi company Joby Aviation to Richard Branson’s space tourism company, Virgin Galactic. Jay-Z himself teamed up with a Spac called Subversive Capital Acquisition to make a deal to take two cannabis companies public.
Goldman Sachs estimates that there are still 400 US spaces with $118 billion in cash looking for deals.
But now, they face a difficult 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 Spac’s frenzy and ensure investors receive accurate disclosures.
SEC officials have warning is given about the huge benefits that one space validators, known as sponsors, get for putting less skins into the game. Then they have advise Investors shouldn’t invest in a space just because a celebrity joins it.
Perhaps the most effective move by the SEC is a new one that many Spacs had to change the way they calculated warrants, a key feature that gave early investors the option to buy cheap stock in the merged company. The regulator said warrants were in some cases misclassified as shares when they were considered liabilities, which has held back prices.
A fresh signal of regulatory intent emerged this week with a blow to the space backed by billionaire hedge fund manager Bill Ackman. The investor said the Wall Street watchdog “puts a knife at the heart” of its purchase of a 10% stake in Universal Music through Spac, Pershing Square Tontine Holdings.
Ackman said the SEC landed the final “deal killer” by reporting that the transaction did not comply with the rules of the New York Stock Exchange, where its Spac is listed.
What is at stake is a complex structure that Ackman and his advisers have devised to address one of the key challenges they face: At $4 billion, it’s too much cash and too few goals to pursue. After spending $4 billion on shares of Universal, Ackman’s Pershing Square hedge fund will add cash to Spac, adding $1.6 billion in search of a company to list shares. Investors also have the option to buy another deal through a start-up that requires no upfront cash. Following the SEC’s decision, Ackman canceled the deal.
Pershing Square will now buy back a $2 billion stake in Universal, which has the option to buy the other half by September. People familiar with the transaction say it will be funded through a joint venture vehicle.
In another development, the securities regulator recently recognized space transport startup Momentus’ ambitions to become a publicly traded company. It issued fines against the company and against Stable Road Acquisition, Spac for which it made a deal at a $1.2 billion valuation, because of misleading investors.
Highly publicized 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 Spaces.
The subsequent slowdown was welcomed by critics. It can even be a relief to exhausted bankers and lawyers who were swamped with dealings with Spacs when the madness peaked.
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