SPACs: A Mystery Unfolding

Welcome back, Readers!

SPACs have been in the news this year than ever before. If you read my previous stories on SPACs, you would recollect few cautionary questions that we deduced. If you are new to the concept of SPACs or if you have not read the previous stories, read here now for better context around this article.

Data from Dealogic and Financial Times show that on average, 52.4% investors have redeemed i.e. pulled out their cash from SPACs (with some having a redemption rate of almost 90%) in the third quarter of 2021. Analysts believe that the SPAC boom in the first quarter of 2021 will never return. The current amount of cash with SPACs is now close to the pre-pandemic level which is quite grim considering the insane spike this year.

One of the reasons for this high redemption rate may be the difference in expectation vs. the reality. SPACs raise funds from investors and invest those funds by merging and acquiring companies. Every SPAC has a defined list in which they would make transactions (it may be some sectors, transaction size, some specific kind of companies, or any other factor and/or a combination of those specifications). With the boom in the start of this year, the supply (of money) was way higher than demand (the number of companies to invest in). Hence, SPACs would expand their investments beyond their defined list. Even with this SPACs suffered to park their investors’ cash. Hence, it seemed that SPACs are not doing “what they were set up to do”. Now that SPACs have limited cash, the dynamics have reversed.

On the other side, when a company comes to a SPAC for an IPO to raise funds, it has a specific cash threshold that the SPAC must raise for the company. With high redemption rate, SPACs are unable to reach the threshold (forget about reaching the total cash to be raised for the company). In this case, some companies such as eFFECTOR decided to let go of the minimum $100 million cash requirement, and Arqit had to settle for 1/4th of the cash raise that was promised to it.

This evidence suggests that the boom was indeed a bubble, at a very wrong time. Referring to the eyebrows raised in the previous article, it is worrisome to know that SPACs now have no enough cash. If the portfolio of companies fail as anticipated, then we do not know what is to come of it. A market crash? Not really. But it is definitely going to have a trickle down effect on the global economy (as if we do not have enough of crisis in the supply chain and energy space to name a few!).

Someone once rightly said, the late and post-pandemic phase of the global economy will unfold many dark stories (some old and some new) and how we handle this phase as a global community will define the face of the upcoming decade. Political decisions, financial decisions, economic decisions… all need to align (or at least tend to it) to peacefully transition to the new normal post pandemic.

Reiterating, as retail investors, it is crucial to understand this story since its performance will have an impact on the financial markets and some economies which may eventually impact your portfolio. Although the impact is not certain yet, some awareness around this topic is never a bad idea!

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Happy Learning! Happy Investing!

Disclaimer: These articles are intended towards novice audience trying to understand the market with little to no knowledge about the same. The purpose is educational and must not be considered as a tip of any sort. Always make your financial decisions based on expert's personal advice to you. Also, do not forget to do your background research and not fall prey to any kind of fraud or manipulation.