KEY HIGHLIGHTS

SPAC IPO pipeline continues to contract: The past week saw a further contraction of the SPAC IPO pipeline. As of February 16, 2022, the number of pending SPAC IPOs had shrunk to 220. Much of this was due to eight new SPAC IPOs being completed, but withdrawals/abandonments of IPO-registrations continue to outpace new S-1 registration filings by a ratio of two to one, albeit at a lower rate than last week. Meanwhile, 603 SPAC IPOs were searching for targets as of February 16, up nine from a week ago. In addition to eight new completed IPOs, another deal terminated when SPAC Astrea Acquisition Corp (ASAX) dropped its proposed IBC with HotelPlanner and Reservations.com after it saw a 90% plus redemption rate ahead of the shareholder meeting scheduled for February 15 to approve the IBC.
It is not only the SPAC sector that has been suffering: The traditional IPO market has not been too hot either. While 2022 has started very slowly for SPAC IPOs, especially compared with 1Q21, the traditional IPO market has fared even worse, all but drying up. As of February 16, only 15 new traditional IPOs (of at least $50 million in size) had been completed in 2022 versus 40 new SPAC IPOs. Moreover, average SPAC proceeds are ~$180 million vs ~$133 million per traditional IPO.
Green shoots of hope? For all the negative news in SPAC land we have been reporting since initiating SPAC Talk three weeks ago, there are success stories, many of which could be attributed to the SPAC sponsor, the topic of this week’s SPAC Talk Focus below. Additionally, there may be some very early signs of green shoots starting to appear. One of the two new SPAC IPOs that came to market in the past week, Axios Sustainable Growth Corp (AXAC.U), upsized its offering by 20% to $150 million. On the de-SPAC side, Concord Acquisition Corp (CND) has just announced a doubling of the initial equity value of its IBC with Stablecoin operator Circle to $9 billion, going against the recent trend of downward revisions. De-SPAC values have also seen a modest pickup recently which could indicate some bottoming out is in progress.

SPAC STATISTICS

Source: WTR Research

SPAC/DE-SPAC RETURNS

Table 1: Live IBCs (Initial Business Combinations)—Key Stats

Source: WTR Research

Table 2: Live IBCs >15% Positive Return

Source: WTR Research

DWAC remains comfortably at the top of the pile of the small list of positive performers, valuing the proposed de-SPAC at an EV/pro forma 2025 revenue multiple of between ~8X (full earnout) and 9.5X (no earnout). For now, all publicity related to former President Trump is good news for DWAC. We do not have a table this week for negative returns greater than –5%. While two-thirds of the 109 pending de-SPACs are trading below the $10 threshold, these are all within the 3% range, which we would regard as the normal range, given the redemption rights afforded to SPAC IPO investors right up to the point of de-SPACing.

Table 3: De-SPACs—Key Stats

Source: WTR Research

Table 4: Top 5 De-SPAC Performers

Source: WTR Research

Table 5: Bottom 5 De-SPAC Performers

Source: WTR Research

SPAC TALK FOCUS

SPAC Sponsors: The Transition from Penny Stock Promoters to Serious Investors of Pedigree

When SPACs first appeared in the 1980s, they were a dubious asset class used in the main by penny-stock promoters or by some Chinese companies with questionable accounting practices, seeking to raise money they would otherwise have been unable to raise through the more regulated traditional IPO route, both with the aim of fleecing millions off unsuspecting investors. As a result, the federal government introduced the Penny Stock Reform Act of 1990, which took steps to stop these fraudulent activities. SPACs re-emerged as a more legitimate investment class in the early 2000s, with the requirement that the IPO funds raised from investors be put in escrow, as well as a limit on the amount of time for the SPAC to make a qualifying acquisition. However, SPACs disappeared again from the investor radar in the aftermath of the market meltdown and Great Financial Crisis of 2008/9, mainly because there were fewer privately held businesses looking to go public at the time. It is only since 2020 that the SPAC market has exploded back into life like never before, and that SPACs appear to have emerged as a serious asset class. Over the last two years, SPACs have for the first time seriously rivalled the traditional IPO market as a route for private companies to gain access to the publicly traded arena.

Although the prevailing de-SPAC meltdown may feel like the return of the ghosts of the past, we are a far cry from the penny stock promoter-driven roulette table of the 1980s. An important differentiator and sign of the SPAC’s elevation to an investable and likely durable asset class is the proliferation of SPAC sponsors who include among them some highly regarded sponsor teams with proven investor pedigrees, backed up by extensive proprietary deal sourcing networks and experience as M&A dealmakers. The SPAC is essentially its sponsor team—its founders, management and director—and markets itself based on that team and what it can bring to a potential target.

That said, there undoubtedly remains quite a bit of chaff in the SPAC investment space, but there are also hidden gems to be uncovered. Not uncommon in thematic-oriented investments, when in fashion the rising tide raises all ships, whether seaworthy or not. Similarly, when enthusiasm wanes, even the better-quality companies can get caught up in the sell-off. This is more so in an investment category where there is still limited research coverage. such as the SPAC space.

Furthermore, not all SPAC sponsor teams are created equal. Given how critical the sponsor team is to the success of a SPAC and ultimately de-SPAC investment, it behooves investors to do their due diligence on the sponsors and home in on SPACs with sponsors backed up by a strong track record of accomplishment.

SPAC Sponsors—Who Are the Best Performers?

So let us look at who is at the top of the sponsor performance pile. Based on all SPACs that have been de-SPACed since the start of 2021, 29 out of 220 were generating positive annualized returns as of February 15, 2022 from the date of the SPAC’s IPO, of which 12 were generating positive annualized returns of more than 20%. Those are listed in Table 6 and show that serial SPAC sponsor Churchill Capital Corp (founded by former Citi investment banker Michael Klein) sits comfortably on top of the pile, returning more than 120% per year since CCIV’s IPO on July 30, 2020.

Table 6: Top Performing Sponsors (De-SPACs With Annualized Returns >20%)

Source: WTR Research

It is perhaps no coincidence that more than 50% of the list (seven) of the high returning SPAC investments in Table 6 are associated with serial sponsors. They are typically made up of seasoned investors and deal makers with reputations that precede them. This arguably gives them a head start over lesser-known sponsors, enabling them to attract more funds from SPAC IPO and PIPE investors, which in turn gives them the ability to target better quality companies. Of course, Table 6 is mainly a reflection of de-SPAC performances over a relatively short period (since the start of 2021), and therefore it could be argued that this may not accurately represent the sponsor’s track record and is merely a snapshot in time for one of their investments. The counterargument is that this period represents a particularly challenging one for de-SPACs, and therefore outperforming in that environment can be viewed as reputation- enhancing for the sponsors in the list.

Nonetheless, in Table 7, we have created a league table of sponsors who have completed at least two de-SPACs. This list measures the performance of the sponsors’ entire portfolio of de-SPACs, which in some case goes back to before 2020. There are many more serial SPAC sponsors than are highlighted in Table 6. Table 7 below represents a more complete picture of sponsor track records. It indicates that the three outstanding sponsors are Kensington Capital, Churchill Capital, and dMY Technology Group, all of whom appear in Table 6 as well. These three have, according to our calculations, achieved sustainable double-digit IRR across their portfolios of SPACs that have been de-SPACed. All three also have pre-deal SPACs in their portfolios, so it might be worthwhile taking note of them. There are a couple of others that have achieved reasonable high single-digit returns success, including prolific SPAC sponsor Chamath Palihapitiya, although his sponsorship of Clover Health Investments (NASDAQ: CLOV) is the main blot in his portfolio of four de-SPACs, which has severely damaged overall returns from his Social Capital SPACs.

Table 7: League Table of Serial Sponsors Track Record

Source: WTR Research

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