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January 10, 2022
Welcome to the SPAC Research weekly newsletter.
2021 Year In Review
2021 was a record-breaking year as over $162bn flooded into SPAC trust accounts -- more than all previous years combined.

In addition, SPACs represented 61% of all IPOs on US-listed exchanges last year, an all-time high.
Source: SPAC Alpha, Dec 31 2021
But as SPAC market participants know, Q1 looked very different from the rest of the year. February and March featured nearly 100 IPOs each. But after market enthusiasm cooled off in March and the SEC poured cold water on SPAC warrant accounting, a different trend began in April.
IPO activity slowed dramatically starting in Q2 despite a 300+ SPAC queue to get out the door. But by Q4, sponsors had figured out that they could successfully IPO as long as they overfunded trust accounts at roughly 102% and shortened their initial tenor to around 18 months. And so by October we were seeing 50+ deals for at least $10bn each month. It's reasonable to expect this pace to continue for at least the next few months unless conditions change.
It's also interesting to look at average warrant coverage. Last January, investors were willing to pay handsomely for the equity optionality component of SPAC common stock -- even on generic SPAC paper. Sponsors were able to reduce the coverage on their IPOs on average below 1/3 warrant per unit.

But as the market tightened, 1/2 warrant coverage has become fairly standard and only the top tier of sponsors can offer less coverage than that at this point.
Another element of increasing warrant coverage is that the average warrant price fell precipitously last year. Remember that the SPAC Research Warrant Index (seen below) measures the total market capitalization of all pre-deal SPAC warrants, divided by the initial trust account values of those same SPACs. At its peak in February, the market cap of all pre-deal warrants represented a weighted average of almost 12% of all capital raised by those same SPACs. By December that was down to 2.5%. (Declining warrant coverage in IPOs also played a role in that move).
The Warrant Index is a pretty good indicator of market sentiment at a given time, as it measures how much investors are willing to pay for generic SPAC warrants. It's noteworthy how similarly that tracks with our favorite market indicator, the median yield on SPAC common equity without an announced transaction.
If we could only share one chart to show the entirety of 2021's SPAC mood swings, it would be the median yield chart above.

On the deals side, SPAC M&A activity blew away all previous years. Nearly 200 operating businesses listed publicly via SPAC in the US, with total enterprise value of $470bn.
Source: SPAC Alpha, Dec 31 2021
But the year's trajectory in deSPACs looked much the same as the fluctuations we saw in the SPAC IPO market. Q1 was full of enthusiasm but the rest of the year featured a much more challenging environment.

Below, we plotted the price of each of 2021's deSPACs on the day it closed. It's not hard to fathom why investors were willing to pay significant premiums to trust in Q1 and why they're much more discerning now.
There are a handful of SPAC indices out there that attempt to measure broad sentiment. But they mostly suffer from straightforward flaws. Inclusion can be arbitrary or mixed in with pre-deal SPACs. And a market-cap weighting is an awkward fit for deSPACs given how float size can play such a significant role in trading performance.

But the indices are generally directionally correct. And it's clear that the performance of deSPACs has been very weak over the past few months. Lots of critics have trashed the product recently, decrying the concept as flawed. But a massive number of last year's deSPACs were early-stage growth companies. And you don't have to squint very hard to see the correlation between, say, the IPOX SPAC Index (in white, below) and the ARK Innovation ETF (in red, below).
Source: Bloomberg
The Ark Innovation ETF had considerably worse performance than the IPOX SPAC Index last year. And it's no secret that growthy tech companies have suffered significant multiple compression as the Federal Reserve changes course to deal with rising inflation.

Nevertheless, investors have clearly noticed that it's harder to do a great SPAC deal than it used to be. The majority of the year's deSPACs happened in the second half. But as you can see below, the average redemption rate rose from roughly 10% in Q1 to over 60% by Q4. The 53 deals that closed between October and December had raised almost $16B in their IPOs but returned nearly $9.5bn to redeeming shareholders.
We looked frequently this past year at the ties between market sentiment and financing conditions. The number of deal announcements peaked in Q1 but remained moderately high throughout the year. But common stock PIPE commitments, a foundation of most strong deals, have become much harder to come by.
If we break the above chart out by individual months however, there's a bit of a twist at the end of the year.

You can't see it very well from the median yield chart earlier, but late October's Digital World Acquisition Corp. (DWAC) announcement with Trump Media & Technology Group led a number of pending deSPACs to trade up materially in the weeks after it was announced. We predicted at the time that an increase in deal announcements would follow. And in fact December saw more SPAC deal announcements than in any month since March.

What's fascinating is that the increase came with a meaningful uptick in common stock PIPE financing.
It seems like there are many more deals with convertible and structured financing out in the market than there used to be. But December's 30 deal announcements averaged over $100mm of common stock PIPE commitments, a significant increase over the prior three months.

It can be hard to tell sometimes if PIPE commitments are really arms-length. Almost all of December's common stock PIPEs came with a nominal price tag of $10 each. But many of them were strategic investments. It's possible that securing meaningful capital from strategics will be a big piece of the successful SPAC playbook in 2022.
It's tough to be too optimistic about the broader SPAC market right now. The field is crowded and the median outcome isn't great. Meanwhile the pace of IPOs is exacerbating the problem, adding more teams and capital to the mix at a moment when the market feels saturated.

The herd could stand to thin out, but the value proposition still seems attractive to sponsors (who may be looking at a trailing liquidation rate of less than 3%). A lot of teams may just now be figuring out the magnitude of the challenge of a successful SPAC deal in a tough market. But it still seems likely that those sponsors with multiple successful deals under their belt will be able to outperform over time.

SPACs are a fast way to access the public markets, and an even faster way to find out how investors feel about your company and valuation. Many SPACs from the past year and a half have focused on thematic trends and venture-style investments. But before 2020, mature-business private equity deals were a more likely path to success. A key question in our minds for 2022 is: will sponsors spend more time shooting for hot trends or sensible valuations? Or said another way: will this year be the year value investing makes its comeback?
News From the Past Week

Deal News

  • VPC Impact Acquisition Holdings III (VPCC) closed its acquisition of Dave on Wednesday 1/5/2/2022. Redemption statistics were not provided. Ordinary shares and warrants are now trading on the NASDAQ as “DAVE” and “DAVEW.”

  • Bloomberg reported that Better World Acquisition Corp. (BWAC) is in talks with Dubai waste firm Averda.

  • Bloomberg reported that L Catterton Asia Acquisition Corp (LCAA) is in talks with Singapore-based Carousell.

  • Bloomberg reported that Social Capital Suvretta Holdings Corp. III (DNAC) is in talks with medical technology company ProKidney LLC.

  • Bloomberg reported that Social Capital Suvretta Holdings Corp. I (DNAA) is in talks with Akili Interactive, a startup that specializes in technology-based cognitive therapies.

New S-1's
Name Ticker Size ($mm) Underwriter Trust Funding Coverage
GLA II Meteora GLAA 220 Oppenheimer 100% 1/2 + R
Murphy Canyon Acquisition MURF 150 A.G.P 101.5% 3/4
Signal Hill Acquisition SGHL 100 B. Riley 102% 1/2



IPOs
Name Ticker Raised ($mm) Sector Cash in Trust Coverage
Screaming Eagle Acquisition SCRM 750 General 100% 1/3
C5 Acquisition CXAC 250 General 102% 1/2
Cartica Acquisition CITE 200 Technology 103% 1/2
Viscogliosi Brothers Acquisition VBOC 75 Healthcare 102% 1/2

Charter Extensions

  • MLAC extended its charter through 10/17/2022 with a $0.03 monthly contribution to trust and 33% of public shares remaining.
  • VCKA extended its charter through 4/11/2022 with a single $0.075 contribution to trust.


Upcoming Meetings and Deadlines

  • 1/11/2022 CPSR Gelesis approval meeting
  • 1/12/2022 DCRN Tritium approval meeting (outside date 1/14/2022)
  • 1/13/2022 PAIC Liquidation deadline
  • 1/14/2022 GMII Sonder approval meeting (merger outside date 1/31/2022)
  • 1/14/2022 MCMJ Leafly approval meeting
  • 1/19/2022 VMAC Anghami approval meeting
  • 1/19/2022 XPDI Core Scientific approval meeting
  • 1/20/2022 TREB System1 approval meeting
  • 1/21/2022 ACEV Charter extension meeting (liquidation date 1/30/2022)
  • 1/22/2022 FOXW Liquidation deadline (outside liquidation date 7/22/2023)

Links

  • Bloomberg reported that Singapore’s Novo Tellus Capital Partners received permission to list its blank check company.
  • Reuters reported that Churchill Capital Corp III (CCXX/MPLN)’s CEO Michael Klein and directors will face a shareholder lawsuit regarding its October 2020 acquisition of MultiPlan.
Disclosures: Site administrators may maintain positions in various SPAC securities and may trade in or out of those securities at any time without notice. Information from spacresearch.com is provided for informational purposes only and should not be relied upon as the basis for any investment decision. Nothing on spacresearch.com is a recommendation or solicitation to buy or sell any investment.
Copyright © 2022 SPAC Research, All rights reserved. SPAC Research is the source of all data unless otherwise noted.

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