During the boom in blank-check companies, their creators couldn’t launch them fast enough. Now they are rushing to liquidate their creations before the end of the year, marking an ugly conclusion to the SPAC frenzy.
With few prospects for deals soon and a surprise tax bill looming next year, special-purpose acquisition companies are closing at a rate of about four a day this month, nearly the same pace they were being launched when the sector peaked early last year.
Roughly 70 special-purpose acquisition companies have liquidated and returned money to investors since the start of December. That is more than the total number of SPAC liquidations in the market’s history, according to data provider SPAC Research. SPAC creators have lost more than $600 million on liquidations this month and more than $1.1 billion this year, the data show.
Many more SPACs have said they would wind down in the coming weeks. The trend is hurting prolific backers such as venture capitalist Chamath Palihapitiya and private-equity billionaire Alec Gores, wealthy former business executives like Gary Cohn and big Wall Street firms such as KKR & Co. and TPG Inc.
For many of the big SPAC creators, the losses have barely dented the fortunes they made during the mania. Mr. Palihapitiya, who said he would shutter two SPACs in September, told The Wall Street Journal that his investment firm made about $750 million across several deals. The firm, Social Capital Holdings Inc., took public companies like space-tourism firm Virgin Galactic Holdings Inc. and personal-finance app SoFi Technologies Inc.
Those SPACs that came late to the game are often struggling to find deals. Falling stock prices and rising interest rates have essentially frozen the market for new public listings, making it difficult for executives to meet their two-year deadline to find a deal. Many of those deadlines are coming up in the first half of next year.
A 1% federal tax on share repurchases that is part of new climate, health and spending legislation has accelerated liquidations. Winding down a SPAC and returning cash to the investors could be considered a repurchase of the company’s existing shares, which would face the buyback tax beginning next year. Some analysts project SPAC liquidation losses will top $2 billion in the coming months.
“Something people thought was going to be a fantastic vehicle for creating wealth is looking increasingly like a poisoned chalice,” said John Chachas, co-managing principal at Methuselah Advisors, a boutique investment bank that has advised companies fielding an increasing number of calls from SPACs desperate to find deals.
Also called a blank-check company, a SPAC is a shell firm that raises money from investors and lists publicly with the sole purpose of merging with a private company to take it public. After regulators review the deal and it is completed, the company going public replaces the SPAC in the stock market.
Such mergers burst onto the scene as popular alternatives to traditional initial public offerings in 2020 and 2021. The boom turned into a bust during this year’s market reversal.
An exchange-traded fund tracking companies that went public this way is down more than 70% this year, dragged down by losses in startups such as sports-betting firm DraftKings Inc. and electric car maker Lucid Group Inc. Companies that went public via SPACs have performed worse than other newly public companies this year.
One characteristic of SPACs is that investors can get their cash back if they don’t want to participate in a deal. When the market was hot, investors often held shares in the newly public startups, expecting big returns or selling immediately if shares had already gone up. Now they are pulling out before the deals close, dramatically reducing the amount of cash companies can raise.
SPACs are now paying less for companies than they did during the sector’s peak. The average valuation of startups announcing SPAC mergers has fallen to about $400 million this quarter from more than $2 billion for most of last year, Dealogic data show. Roughly 300 companies have gone public through SPACs in the last two years.
There are still nearly 400 SPACs together holding about $100 billion that have yet to find deals, according to SPAC Research. If roughly 200 of the SPACs liquidated, the losses for creators would be well above $2 billion, said New York University Law School professor Michael Ohlrogge, who studies SPACs. SPAC creators have lost about $9 million on average through liquidations this year, money they paid to banks and law firms to set up the shell companies.
There are another roughly 150 SPACs holding about $25 billion that have reached merger agreements but haven’t closed them, including a blank-check firm that is trying to take public Donald Trump’s social-media company, according to SPAC Research. Some of those will likely get called off, meaning liquidation losses could end up being even greater than expected.
To some observers, this year’s losses show why SPACs are inefficient for companies seeking to raise money or go public.
“It just emphasizes the needlessly wasteful aspects of the SPAC structure,” said Mr. Ohlrogge, who has proposed companies could get the benefits of a blank-check merger while doing a variation of a traditional IPO or direct listing.
