In 2021, SPACs were everywhere. Companies liked the fact that SPACs could take them public more quickly, and often with higher valuations, than traditional IPOs. Some 610 companies used SPACs to go public, and SPACs comprised nearly half of all IPOs that year. Even celebrities like Steph Curry, Jay-Z, Serena Williams, and, um, Sammy Hagar joined the SPAC craze.
But, in 2022, the bubble burst. Only 86 SPACs took companies public that year. By 2023, only 31 SPACs took companies public, or around 15% of all IPOs. Then, in January 2024, the SEC implemented regulations that brought SPACs more closely in line with traditional IPOs. SPACs are now required to make more disclosures about sponsor compensation, dilution risk, conflicts of interest, and other areas, and their target companies face greater legal liability.
Can SPACs regain some of the ground they’ve lost over the past two years—or are they a fad that’s run its course? We spoke with SPAC experts to learn what effect the new regulations will have on the SPAC market, and whether the heyday of the SPAC is truly over.
Why the SPAC boom went bust: The regulations came as no surprise to SPAC sponsors, Derek Kearns, partner and SPAC practice leader at Centri Business Consulting, told CFO Brew.
“The initial shock of the rules came, more so, two years ago [when the SEC first proposed them],” he said. Since then, SPACs have been preparing for the regulations and improving their disclosures through the SEC comment letter process, he added, with the result being that the regulations “are really more of a formalization of things that have been happening over the past couple of years.”
But the new regs are slowing SPACs down. “The speed to market of SPACs has been much slower” than it was in 2020 and 2021, PwC US IPO leader Mike Bellin told CFO Brew. The average time between a SPAC’s formation and its merger with a target company nearly doubled between Q1 and Q4 of 2022, from 8.7 months to 15.2 months, according to Mergermarket data. Now, the time it takes a SPAC to bring a target public is “very similar to a [traditional] IPO timeline,” Bellin said. That may make SPACs less appealing to companies that once saw them as a quick route to going public.
However, the Fed may be as much to blame as the SEC for the decline in SPACs. High interest rates, along with other macroeconomic factors, meant there were fewer IPOs of all stripes in 2022, Bellin said. The private investment in public equity (PIPE) market was “fairly closed in 2022 and 2023,” he said, giving SPACs less access to capital.
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What’s more, some SPACs that went public in 2020 and 2021 failed to meet expectations. The SPAC rush may have spurred some companies to go public before they were ready, both Bellin and Kerns said.
“There were great valuations out there. Companies went to the markets really quick and not all of them put in that maturity that [was] needed to be a public company,” Bellin noted.
And, with so many SPAC sponsors looking for targets in 2021, “there probably weren’t enough quality companies to acquire via SPAC,” Kearns said. Twenty-one companies that went public via SPAC filed for bankruptcy in 2023, Bloomberg found, costing investors $46 billion.
The future of SPACs: Going forward, both Bellin and Kearns said they expect the SPAC market to normalize. “I do think we’ll continue to see SPAC transactions but at a much, much lower volume than we saw the last several years,” Bellin said. “I think it will revert back to the historical mean.” Before the 2020–2021 boom, the number of SPAC IPOs per year varied widely, but ranged anywhere from 1–66, according to data from SPAC Analytics.
The new regulations will likely make both investors and companies more cautious where SPACs are concerned, Bellin said. The regs make completing a de-SPAC transaction “more challenging” and “more risky,” he said, and so “companies [will] think long and hard” about whether to “undertake a SPAC merger versus a traditional IPO or stay private,” he said. And the regulations, he added, coupled with the weak performance of some SPACs, “will be in the back of investors’ minds before they go into a deal.”
But for some companies, SPACs will still make sense. The right companies, Bellin said, can benefit from the expertise of “serial” SPAC sponsors that have industry experience and connections. “It’s almost similar to a private equity deal where you’re taking a target company public with a very experienced and well-connected management team,” he said. “If those folks are sitting on your board, they’re going to open up new opportunities for your organization.”