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Investors are pulling cash out of special purpose acquisition companies at increasingly higher rates, with a number of vehicles having their trust accounts almost wiped out as more than 90 per cent of their shareholders redeemed investments.
The average redemption rate during the third quarter was 52.4 per cent, according to data provider Dealogic. That marks a significant increase from the first three months of the year when just 10 per cent of investors chose to redeem their cash and is up from 21.9 per cent in the previous quarter.
The jump in redemptions shows that Spacs, which were the hottest product on Wall Street earlier this year, have fallen out of favour with investors. Redemption rates now reflect levels before the boom in blank cheque companies.
One top Wall Street banker said the spike reflected the Spac frenzy in the first three months of 2021, when about $100bn worth of blank cheque companies were listed.
“We’ll never see Q1 again, never,” he said, asking not to be named as the topic risked angering some of his corporate clients. “Q1 of this year will go down as the 2000 internet bubble for Spacs. There was a unique confluence of factors that drove that insane risk-seeking behaviour, particularly at a retail investor level.”
The trend casts doubt over claims that listing through a Spac offers greater deal certainty than a traditional initial public offering, one of the key benefits touted by proponents.
Companies that choose to list through a merger with a Spac, a shell company that raises money by listing on the stock market and puts it in a trust before finding a target, could now end up with much less cash than they had expected.
“There is an argument that says these Spacs aren’t doing what they were set up to do. There’s not much cash left in these vehicles at the point of acquisition,” said one senior equity capital markets executive at a large bank. “As a company that sells into the Spac, you get a vastly different deal to the one you thought you signed up to.”
Biopharmaceutical start-up eFFECTOR Therapeutics expected to receive at least $100m in proceeds from its merger with Locust Walk Acquisition, a Spac that raised $175m when it listed in January. However, the cash held in the trust account was almost entirely wiped out when 97 per cent of shareholders chose to redeem, leaving just $5.2m.
While some of the shortfall was covered by a $60m private investment in public equity transaction, eFFECTOR received just $53.5m after fees and expenses.
Large redemptions can scupper a deal as many companies set a minimum cash threshold to be met for the transaction to be completed. While eFFECTOR chose to waive its $100m cash requirement, other companies may insist on the Spac sponsor bringing in more money.
Heritage Assets, an investor in the sponsor behind Centricus Acquisition, stepped in to buy 2.2m shares in the Spac after almost 94 per cent of shareholders chose to redeem following its deal to acquire Arqit. The UK-based network security company, which had expected to receive $400m in cash from the transaction, had to settle for about a quarter of that sum.
“High redemptions means there isn’t enough of a market to step in and buy those redemptions,” said Michael Klausner, a professor at Stanford Law School who studies Spacs. “That’s a bad sign, but it’s not surprising. It would be typical pre-bubble.”