Gone but not forgotten middle market growth

So far, 2022 has been a disastrous year for SPACs. According to data from Bloomberg, the number of new issuers of SPAC has fallen 94 percent from its all-time high. While the year is only three-quarters up, 2022 has seen only 70 total SPACs so far (compared to 613 seen last year), amounting to less than 8% of the new issuances seen in 2021.

A number of factors have come together to limit SPAC this year, including tightening financial conditions, limited appetite for IPOs, poor performance from existing SPACs, and new rules proposed by the Securities and Exchange Commission that limit the way SPAC operates. can change.

“There are a lot of things in the market right now for investors to digest,” says Burke Dempsey, head of investment banking. Wedbush Securities, adding that investors are still in the process of understanding the implications of those proposed rules. He also points to valuation volatility associated with rising rates and inflation, which has made SPAC financing through the PIPE (private investment in public equity) market more expensive. “SPACs are not dead,” he says, “but it will take some time to shake it all out.”

SPAC isn’t dead, but it’s going to take a while to get them all moving.

Burke Dempsey

Wedbush Securities

market under pressure

When SPACs were at their peak, much of the activity was driven by celebrity deals or speculative technology companies trying to market to the promise of future revenue. The frenzy led to record releases and ultimately poor performance for investors. In early September, the year-to-date performance of the S&P US SPAC Index was down -13.97%. In addition to those high-profile deals, a quiet group of SPACs were coming out mid-market as private equity sponsors turned to the vehicle for listing companies. Although these SPACs generally outperformed, they have run into the same headwinds.

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“There is a narrative that the slowdown is only happening in SPAC, but the broader IPO market has slowed into a tough one and SPAC is really just another type of IPO,” says Richard Humphrey, a partner. SPAC Research, a firm that tracks the performance of new issuance and de-SPAC transactions. “I’m not sure they can overtake that reality, even if other regulatory concerns aren’t slowing down new issuances.”

EY. according to the data ofYear-on-year in 2022, global IPO volumes are down 46%, with earnings down 58% for the first half year-on-year from 2021. This year’s ten biggest IPOs have come from the energy sector, which is replacing technology. The sector that dominated both traditional and SPAC listings last year. Tech sector deals are still happening, but the overall deal size is small, falling from $293 million in the first half of last year to $137 million this year.

Humphrey notes that this may not be a permanent condition. “Many SPACs that we track are facing their liquidation deadline in the next 3-12 months, which means they will have to find a company or return the money to investors. Chances are,” he says.

regulatory uncertainty

The SEC has also proposed rule changes in an effort to conduct the SPAC like a traditional IPO. One reason for the rise in popularity of SPACs is that the structure provides underwriters with a measure of protection if they help bring a transaction to market from a company that is more speculative. It does not mean only celebrity SPAC, it can also include some technology and pharma companies that are getting listed based on anticipated revenue.

However, if those companies do not perform well after listing, investors are left with underperforming stocks. The traditional IPO market can also underperform, but there are more barriers to ensuring that companies have defensive business models in place before they go public. Individual investors have limited access to traditional IPOs, which means they are likely to have more clarity about how a newly listed company is performing prior to their investment.

Under the SEC’s proposed rules, underwriters would have more liability if the transaction’s backing went south. There have also been changes in accounting and marketing rules that would make it more difficult to use SPAC to list a purely speculative company. The SEC opened a public comment period to solicit feedback and a vote on the final rules is imminent, but it is unclear when that will happen. Despite this, the proposal has already led to a pullback from issuers and financiers as they assess risk and compliance risk, and consider adjustments to existing due diligence practices to align with any final rule amendments. .

“We’re already seeing more due diligence on the transaction,” says Brian Hirschberg, partner at the law firm. mayor brown, “Parties in D-SPAC transactions are often observing due diligence procedures that have become customary in traditional IPOs as the standard for establishing a due diligence defense remains unchanged. These often include letters of comfort and negative assurance letters to SPAC PIPE’s placement agents. Delivery is included.”

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Jeffrey Schultz, an attorney at the law firm mintz, agree with it. He says that despite the downturn, it’s going too far to say that SPACs are dead — especially for the middle market, for which he says SPACs can be an effective exit tool. He said institutional players like private equity firms and others have helped the market mature.

“I think what we’re doing right now is working to find the formula that works. There’s a big flight to quality. Does this mean the end of SPAC? I don’t think so,” he Says. “The SPAC market has matured quite a bit. There are experienced issuers in this space who are already doing a lot of this sort of thing. I don’t think we’re going to see a repeat of 2021, but we will see SPAC go public. Will continue to be another tool in the tool box for private companies seeking to be.

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