One of the hottest corners of financial markets is getting slightly less manic.
Billionaires, celebrities and athletes have raced to create special-purpose acquisition companies, or SPACs, over the past six months. These “blank check” firms, which raise money from investors and then go hunting for takeover targets, have been flagged as a sign of overexcitement on Wall Street.
New scrutiny of SPACs from regulators appears to be forcing a cooldown, however. Last week was the first time all year that no new SPACs hit the market, according to Renaissance Capital.
“Over 250 SPACs are on file so we’re not calling the end, but investor enthusiasm for this vehicle is waning,” cofounder Bill Smith told clients.
In a research note published last week, Goldman Sachs analysts noted that issuance has “screeched to a halt” in April, with only six new SPACs created so far in the second quarter. This time last quarter, 55 fresh SPACs had made their debut.
The investment bank, which called the slowdown “warranted,” said recent announcements from regulators have hurt sentiment. In late March, the Securities and Exchange Commission issued a statement expressing concerns over disclosures and governance related to SPACs. Earlier this month, the agency indicated it would tighten some accounting standards.
The mood has been tough for shares of SPACs that have already listed. Like other risky assets, they’ve been hit by turmoil in the bond market, where yields are rising thanks to inflation concerns.
See here: The Defiance Next Gen SPAC Derived ETF, which tracks more than 200 US-listed SPACs that are both pre- and post-acquisition, is down more than 15% in the past two months. The S&P 500 has increased more than 9% over the same period.
That could hurt individual investors that have piled in this year with hopes of cashing in on the craze. Short selling, where investors place bets that pay out if stocks fall, has increased as SPAC shares have suffered, according to data from S3 Partners.
“We are seeing active short selling … as stock prices in the sector decline,” analyst Ihor Dusaniwsky said in a recent research note.
Big picture: The massive wave of SPACs has been fueled by low interest rates and stimulus spending. It has also triggered alarm bells among market watchers, and many had been stressing that a break was needed.
“There has been so much SPAC activity that the market was getting indigestion,” Duncan Davidson, general partner with venture capital fund Bullpen Capital, recently told my CNN Business colleague Paul R. La Monica. “We need a pause.”
Even if the creation of new SPACs stays light, the hundreds already in existence will continue to have a serious impact on the market.
Goldman Sachs estimates that SPACs could drive a $900 billion wave of mergers and acquisitions in the next 24 months, with $129 billion of capital currently searching for target companies.
