SPACs raised billions. As mergers dry up, we follow the money

At the same time, many existing spacs are having trouble finding merger targets. The big-shots (or “sponsors”) who erect the empty shells are typically given 24 months to find a business to acquire (or to de-spac, in Wall Street lingo). They are struggling: 27 such transactions were announced in the first three months of 2022, compared with 77 during the same period in 2021. Of the 298 spacs listed in the go-go first quarter of 2021, raising $97bn, 196 have yet to announce a de-spacing. In all, more than 600 American-listed spacs are still searching for a target. That is a lot of clocks counting down, and a lot of unspent cash. Where is it all now?

Ironically, much of this money, once chasing some of the riskiest tech bets out there, has been parked in finance’s dullest quarter. Approximately $160bn currently sits in trust accounts, invested in risk-free Treasuries. It could be ploughed into the next white-hot tech stocks in early 2023, when the countdowns end and investors’ cash is returned. Until then, being locked up in a spac without the prospect of a merger resembles investing in a money-market fund. Investors profit from the difference between its trading price and the money returned upon its liquidation. At present, the average yield-to-maturity on these blank cheques is above 3%.

Astute investors know better than to hang around for the blank cheque to blossom into a real business. After a spac announces a merger, investors are given the chance to redeem their shares and have their investment returned. Average redemptions are running at more than 50%. Excluding additional funding and deals hanging in limbo between announcement and completion, The Economist calculates that less than $40bn of capital invested in spacs since 2020 has found its way onto the balance-sheet of an operating company. That is roughly the valuation at which Grab, a South-East Asian super-app, tied up with a spac in December 2021.

Investors in de-spaced firms have fared far worse than those in spacs wanting for a target. One recent study finds that barely more than a third hit their revenue projections. Many are short of cash. Almost half of the companies included in the de-spac index are currently burning through cash fast enough to empty their coffers within two years. This month Canoo, an electric-vehicle maker whose investor presentation benchmarked its valuation to Netflix and Tesla, expressed “substantial doubt” about its future as a going concern.

An index tracking 25 large companies which went public through de-spac transactions is down by 52% this year, compared with a 27% fall for the tech-heavy nasdaq (see chart 2). Grab is now worth $10bn. The dilution caused by free shares designed to compensate a spac’s sponsor magnifies the sector’s losses.

Unsurprisingly, then, spacs are once again paraded as symbols of market excess, where moonshot assets were pursued at otherwordly valuations. In practice, a stockmarket correction and increased regulatory scrutiny means the majority of spac investors will never see their cash put to work. They are the lucky ones. ■

For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.