A key source of funding for transactions, companies with a blank check are drying up, pointing to a slowdown in one of Wall Street’s hottest products after a record quarter.
Advisors to special-purpose acquisition companies, which float on the stock exchange and then go in search of the company they are buying, say they are trying to find so-called pipe financing to complete the planned acquisitions. Pipe stands for private investment in public capital.
Institutional investors such as Fidelity and Wellington Management have invested billions of dollars in pipe business since the Spac emerged last year, paving the way for public markets for companies ranging from established software and entertainment companies to speculative flying taxi developers and electric vehicle technology. .
But people involved in negotiating deals say pipe investors are overwhelmed by the sheer number of transactions and repelled by rising estimates.
“There’s a lot of indigestion,” said one senior bank executive. “The pendulum has turned where it will be very difficult and painful for you if you are currently in the pipe market. Spak returns to the ocean if you fail to do the pipe. “
Spacks raise money when they first find themselves on the stock market, but they usually need more capital to fund their acquisition. Large institutional investors also act as a form of validation of the target company’s business perspective and its assessment.
117 jobs were announced this year, but the growing backlog in Pipesi could prove to be a major hurdle for 497 companies with a blank check still looking for work, according to Refinitive.
So far, only about 25 percent of the Spaks listed since 2019 have closed deals. Sponsors usually have two years to complete the merger, otherwise they must return the capital they raised to investors.
Several market participants said the slowdown would lead to a “flight to quality” and downward pressure on estimates of acquisition goals, which have risen sharply in recent months.
Almost all executives interviewed by the Financial Times said they see negotiations with Spac to offer more favorable terms to pipe-dwelling investors. One said, “It’s called the shopping side for a reason.”
Because pipe investments are considered illiquid – money is tied up at least until the deal is completed and a lockout period may follow – investors can usually get favorable terms. They can see the contract before it is announced to the public and are almost always able to buy it at a Spac list price of $ 10.
But earlier this year, pipe investors demanded that they get involved in Spaco’s business. A group of institutions that supported the acquisition of Churchill Capital IV electric car maker Lucid paid a 50 percent premium on the price of Spac’s list to get a stake, almost unheard of at the time.
The recent turnaround has forced pipe investors to negotiate lower estimates for companies, giving them larger stakes for the same amount of money and better prices.
“Investors will only want so much illiquid exposure,” said another bank chief executive who has worked on a number of Spac’s operations.
The slowdown in the pipeline is bad news for banks that are unable to charge advisory fees if they cannot sell the deal to investors.
It is also beginning to affect the Spaco launch pipeline, lawyers and bankers said. In the first seven days of this month, only four blank check companies went public. That compares with 41 during the first week of March and February 28, according to Refinitive data.
“Where we were crazy, crazy, fast-paced in January and February, we’re currently stalled on the IPO side,” said Ari Edelman, Reed Smith’s corporate practice partner.
For those who have already gone public and are looking for a target, he added, “he hopes this is just a hit on the road. And then in the end the job is done. “