The SPAC Craze Came And Went. The Leftovers Are In For A 'Bloodbath'

Months into the pandemic, special-purpose acquisition companies exploded in popularity before fizzling out in the spring of 2021. But the repercussions of that brief boom are yet to come.

Hundreds of billions’ worth of capital was raised from private investors by SPAC founders between mid-2020 and mid-2021, many of them targeting proptech or otherwise real estate-adjacent companies to acquire and take public. But after some high-profile flops, SPACs have lost their luster, both for retail investors on the public market and for companies that would be potential merger targets. With over $188B still held in trust by SPACs awaiting mergers, some of the investment format’s biggest promoters could be left holding the bag.

“Unfortunately, I don’t think it’s going to be a soft landing,” Shadow Ventures founder KP Reddy told Bisnow.

SPACs go public at $10 per share, and then have two years to find an acquisition target, at which point investors can choose to either remain invested or redeem their shares for cash. Some of the biggest real estate names to be acquired by a SPAC, such as Latch, Opendoor and WeWork, are now valued well below $10 per share on the public markets, meaning that any investors who stuck with their sponsors’ merger targets have so far eaten a loss. Smart glass manufacturer View was valued at $1.32 per share at the close of trading Monday as it faces imminent risk of delisting by Nasdaq.

“We’re in a correction period, which I think will be fairly lengthy,” said Peter Lewis, Wharton Equity Partners chair and founder. “I think you’re going to see some bloodbaths going on.”

Proptech and real estate-focused SPACs may stand to lose more money than those in other industries, as sponsors with real estate ties can raise much larger sums from their business networks than a given venture capitalist can.

“That’s what drove some of this frothiness — you had large asset managers that typically manage physical assets, but they have access to so many sources of capital that it was easy for them to say, ‘Let me go build a proptech SPAC,’” Reddy said.

Even late into 2021, platforms tracking the SPAC market like SPAC Hero and SPACTrack were posting announcements of new SPAC formations and merger agreements, also known as de-SPACs, with regularity. Now, by far the most frequent updates on the sites are of merger agreements getting terminated, with a common explanation being unfavorable market conditions. While public markets have suffered amid the Russian invasion of Ukraine, conditions might be especially unfavorable to SPACs as investors have become suspicious of the very concept.

“To be clear, no great companies went public via SPAC,” Reddy said. "At the very beginning, maybe a few because it was fast, but certainly not now.”

Other SPAC mergers, such as that of SoftBank-backed mortgage and real estate platform Better, have been indefinitely delayed. Clearly, companies seeking to avoid a traditional IPO are rethinking the risks involved with having the public markets weigh in on their valuation, Lewis and Reddy agreed.

“I’ve seen these cycles where overexuberance leads to disappointment,” Lewis said. “All the SPACs are getting painted with a broad brush right now.”

As spring turns to summer, more and more pre-merger SPACs will be approaching their deadline to either find an acquisition target or return their shareholders’ money. Though it amounts to giving up on recouping the costs associated with taking a SPAC public, the bulk of sponsors will likely wind up returning shareholder money rather than consummate an ill-advised merger against the deadline, Lewis said.

But for some, the risk runs deeper. 

Typically, a SPAC’s founders put in a certain amount of equity upfront before securing private investments in public equity, or PIPEs, and taking their company without a product or service public. Only when given that “blank check” can founders legally line up the acquisition of a company, at which point they have probably racked up enough fees and promotes to cover the initial cost of their equity. When the SPAC craze was at its peak, some of the more prolific sponsors began to borrow for their initial investment, banking that the back-end money will be enough to pay off their loans, Reddy said.

“These guys that were the first movers and put a lot of their investment into SPACs have doubled and tripled down,” he said. “When it was at its frothiest, sponsors were borrowing their capital. If you take the upfront risk away, everyone can do a SPAC. So now what happens is, you took money from [investors] for a SPAC, you have a timeline to de-SPAC, and everyone has to get paid. They’ve got their hands out waiting, so there’s a ton of pressure to de-SPAC, whether it’s a good deal or not.”

For the most brazen of such operators attempting to run multiple SPACs at once, some loans were structured to depend on one SPAC finding a successful acquisition in order to finance and pay back another, Reddy said.

“It’s kind of like having a second mortgage, but if you have to sell the property when it’s [financially] underwater, everybody gets screwed,” he said.

In order for any merger to happen, no matter how bad an idea, the acquisition target still needs to agree. Fewer companies seem willing to do so these days in the face of both market attitudes toward SPACs and the tense economic environment, Lewis said. But he and Reddy agreed some companies that don’t have easy ways to cut costs and aren’t growing fast enough to attract a new series of private investment will take the cash infusion that a SPAC promises.

There remains an overabundance of liquidity in capital markets around the world, as unprecedented levels of private equity now have fund managers hunting for investments that can deliver promised returns. As companies that have gone public via SPAC continue to falter, their stock prices may drop enough for enterprising investors to take them private again and rehabilitate their value, Lewis said. But before any of that upside can be realized, overly ambitious sponsors and the investors who bought into that ambition will have to pay the price.

“Whenever something starts getting irrationally juicy, somewhere, somehow, there’s a reckoning,” Lewis said. “It’s just a question of when it comes.”