SPACs aren’t popping anymore as new deals flood the market, scrutiny increases

Published Thu, Mar 25 20219:19 AM EDTUpdated Thu, Mar 25 202111:08 AM EDT

Key Points

The first-day return of SPACs dropped to near 0% in March from 5.4% in February and 6.1% in January, according to University of Florida finance professor Jay Ritter.
The current debut performance is even worse than blank-check deals' historical average of 1.1% from 2003 to 2020.
More than 100 launches took place this month alone, marking the first month where the number of issuance has topped 100, according to SPAC Research.

Just a few weeks ago, every SPAC IPO was guaranteed a big pop on the first day it came to the public market. Not anymore. The first-day return of U.S. special purpose acquisition companies dropped to near 0% in March from 5.4% in February and 6.1% in January, according to data from University of Florida finance professor Jay Ritter. The current debut performance is even worse than blank-check deals' historical average of a 1.1% increase from 2003 to 2020, his data said. The rapid change in performance came as a record number of new SPACs flooded the market. In fact, there have been 105 launches this month alone, marking the first month where issuance has topped 100, according to SPAC Research. It took the red-hot market under three months to outdo its record-breaking 2020 with a total of 296 deals raising $96 billion this year, according to SPAC Research. "The huge increase in supply has been having an effect on the prices of SPACs," Ritter said. "This supply surge is overwhelming the market." SPACs are considered a backdoor way for companies to go public. They are formed to raise capital to merge with a private company, which will be taken public in the process, usually within two years. The rally in post-merger SPACs also rolled over. The proprietary CNBC SPAC Post Deal Index , which tracks the 50 largest SPACs that have come to market and announced a target, wiped out 2021 gains and fell 9% on the year. 'Led to the slaughter' As the popularity around SPACs continues to rise, so does the regulatory scrutiny. The Securities and Exchange Commission has officially opened an inquiry into the frenzy, asking underwriting banks about how they manage the risks, Reuters reported, citing four people familiar with the matter. The regulators issued a warning against celebrity-backed SPACs this month. Starwood Capital Group Chairman and CEO Barry Sternlicht, who has been involved with six SPACs, said investors could get burned in some low-quality deals. "There's a lot of rookies out there and just beware," he said Wednesday on "Squawk Box," without mentioning any specific names. "I hope the public is not being led to slaughter." Nikola , the electric truck company that went public last year via a SPAC, became the poster child of questionable blank-check deals. The company is under SEC investigation after allegations of misleading investors by making exaggerated claims about its technology. Nikola has also been sued in several class action lawsuits for allegedly failing to disclose material information. Andrew Pendergast, who leads the SPAC practice at insurance broker NFP, said security claims against SPACs have increased recently. "The claims against SPACs don't come in until the deal is closed, and they are becoming more common," Pendergast said. "We have over 500 SPACs out there searching for targets that will be transacting over the next 18 to 24 months. Are we going to see a massive influx of securities litigation? The insurance in the marketplace has become incredibly expensive because of the supply and demand economics."

Jin Lee | Bloomberg | Getty Images

Just a few weeks ago, every SPAC IPO was guaranteed a big pop on the first day it came to the public market. Not anymore.

The first-day return of U.S. special purpose acquisition companies dropped to near 0% in March from 5.4% in February and 6.1% in January, according to data from University of Florida finance professor Jay Ritter. The current debut performance is even worse than blank-check deals' historical average of a 1.1% increase from 2003 to 2020, his data said.