January 13, 2021 – The previously obscure SPAC market hit headlines last year, with over 600 blank-check companies listing on public exchanges, up from 248 in 2020.
Almost half of those occurred in the first quarter, before a prolonged slump in activity. But there were glimmers of hope for a rebound in Q4 after the announcement of a potential “meme SPAC” merger between DWAC and Donald Trump’s new media start-up drew retail investors back into the space.
A SPAC, or special purpose acquisition company, raises money through an IPO and then aims to acquire or merge with another company. These blank-check vehicles raised $96 billion in the first quarter of 2021 alone, according to the Harvard Business Review.
An early investment in the right SPAC can generate significant returns, because the company’s share price will often soar once a potential merger is announced. For example, Churchill Capital Corporation IV saw its shares rise 7% in a single day in July after shareholders approved the SPAC’s merger with the electric vehicle manufacturer Lucid Motors.
“The market moves quickly, and it swings between super-hot and ice-cold sentiments,” SPAC arbitrage investor Julian Klymochko, whose firm Accelerate Financial Technologies runs an actively-managed SPAC ETF, told Insider in a recent interview. “It’s quite manic-depressive – we can move from a frenzy to a bear market very quickly.”
Insider asked Klymochko and two other SPAC experts about their expectations for 2022. Klymochko also shared 18 publicly-listed blank-check companies that could surge this year if they announce suitable acquisitions.
2022 investing outlook
Klymochko said that better deal execution could be one important theme for the SPAC market in 2022. One risk of investing in these vehicles is that they may not be able to find a suitable company to target – and after two years of listing on an exchange, these unsuccessful SPACs must return all of their funds to investors.
“2022 has to be a year of execution – we need to see some business combinations,” Klymochko told Insider. “If we don’t see some high quality mergers, all this will have been for naught.”
Kristi Marvin, who founded the specialist research firm SPAC Insider, worries that SPACs could struggle this year if the tech stock sell-off continues. Blank-check companies have tended to view higher-growth firms as attractive acquisition targets.
“The macro environment is weighing on the larger equity market,” she told Insider in a recent interview. “For SPACs, which tend to combine with growth or technology companies, it’s going to be even more pronounced and weigh down an already overly competitive field.”
But Enrique Abeyta, an executive for famed investor Whitney Tilson’s Empire Financial Research, shrugged off concerns about the rotation from growth into value. He told Insider the SPAC market’s struggles in the second half of 2021 had created an opportunity for investors to “buy the dip” on blank-check companies this year.
“Last year, enthusiasm got exceptionally heated, retail investors poured in, and then the market went from boiling to frigid very quickly,” Abeyta said. “But now, SPACs are trading at incredible valuations, because the SPAC brand in itself is a bit tainted.”
SPACs to watch
“High-quality SPAC sponsors have a clear advantage – they have pipeline investors who will back them because of who they are, and that means that they can have legitimate conversations with companies that are looking to list,” Abeyta added. “That’s why retail investors should look out for household names.”
Marvin told Insider that these sorts of SPAC sponsors can often draw on significant experience during the challenging merger process, improving their ability to execute deals.
“If you’re buying a SPAC that hasn’t announced a deal yet, you want to diligence the sponsor team,” she said. “If a team was previously able to navigate the SPAC process, they will have an advantage over other teams.”
Klymochko agreed that it is crucial for retail investors to prioritize investing in blue-ribbon SPAC sponsors. He highlighted 18 SPACs from four sponsors – Churchill Capital, FTAC Ventures, the Gores Group, and Social Capital.
Churchill Capital featured in one of last year’s major SPAC market stories when its fourth fund brought Lucid (LCID) to market. Its current blank-check offerings trade under the tickers CCV, CCVI, and CCVII.
Industry veteran Betsy Z. Cohen has sponsored fintech SPACs since 2015. She is currently the chairman of three blank-check companies – FTAC Athena, FTAC Hera, and FTAC Parnassus.
Private-equity firm Gores has completed $36 billion worth of SPAC deals to date, including bringing 3D spatial data firm Matterport and premium EV manufacturer Polestar to market. It currently sponsors six SPACs – GSEV, GIIX, GTPA, GTPB, GGPI, and GMII.
Social Capital founder Chamath Palihapitya is one of the highest-profile names in the SPAC industry – his firm took Virgin Galactic public in 2019. Klymochko highlighted biotech vehicles DNAA, DNAB, DNAC, and DNAD, as well as Palihapitya’s joint ventures with Hedosophia IPOD and IPOF, as SPACs to watch.
“Those are the main four sponsors I’d suggested,” he told Insider. “Top-tier sponsors are always worth following, and those four have all been successful in the past and have multiple SPACs listed at the moment.”