Switchback Energy: Peak SPAC or Trough SPAC?
Switchback Energy breaks $10.00 on first day of trading.
In very surprising news, Switchback Energy (SBE.U), the $300 million energy SPAC, underwritten by Goldman Sachs, Citigroup and Credit Suisse, opened today at $9.95. In fact, the day’s high so far has only been $9.96. To put this is in better context, it’s very rare to have a SPAC break their $10.00 unit price. In fact, of the 35 SPACs priced so far in 2019, only one other IPO broke $10.00 on day-1 and that was yesterday’s Fellazo (FLLCU), which closed at $9.95. So now we’ve had two SPACs, two days in row, trading below their IPO price. Is this a reaction to “Peak SPAC“? Or is this “Trough SPAC”? Or some combination of both?
Before we can answer that, the facts are that Switchback was always going to be a difficult sell. While the SBE team might have had stellar backgrounds and credentials, they were still “unproven” when it came to SPACs. Without having a successful combination under their belts to point to, the 1/3 warrant structure and 24 months duration was a tough pill to swallow for many SPAC investors. Plus, add in the fact that their intended focus of energy is in an out-of-favor sector AND that their sponsor had previously backed a $552 million energy SPAC that recently liquidated (Vantage Energy), well….that’s a lot of speed bumps.
However, experienced SPAC investors (who’ve been around long enough to see a few of these cycles) will tell you that much like the tide, you can count on terms to tighten and loosen at fairly regular intervals. To wit: last fall of 2018, when terms shifted and became extremely tight for deal teams. Naturally, that 2018 tightening was a reaction to a huge amount of deals over the summer that were given very generous terms, but at the same time, announced combinations were pretty lackluster. As a result, investors (who are the ultimate gate keepers to terms) pumped the brakes. Perhaps this same situation is occurring now.
As for “Peak SPAC”, well, that might still be happening anyway. As was mentioned previously, Peak SPAC might be indicative of a bifurcation of the product where A++++ teams, such as Conyers II and Churchill II, can attract an alternative type of investor into the SPAC vehicle. As we saw last week when Conyers II IPO’d, allocations to traditional SPAC investors were meager, at best, and yet, it still managed to trade to $10.29 and close day-1 at $10.23. So who was sold the $450 million IPO if not the traditional guys? However, 1/4 warrant-type deals are rare (as they should be), so maybe it’s not a bifurcation per-se, but a small branch off a very large tree.
Nonetheless, traditional SPAC players are shaking that very large tree. Clearly, investors did not like Switchback’s structure and as a result, the book was probably a little weak. When a book is weak, there’s not a lot of demand, and as a result, the share does not perform. So is this “Trough SPAC”? Meaning, is the party over? (note: I had a number of emails asking that) No, not by a long shot. Yes, two SPACs in two days breaking $10.00 is very surprising, but it most definitely doesn’t mean all SPACs will perform poorly going forward.
What it IS though, is a message. Remember, investors are the ultimate gatekeepers, and they are telling the market they do not like these terms. If they did like the terms, they would be buyers. It’s pretty simple. Perhaps the Conyers II deal with it’s 1/4 warrant raised the bar and teams that would have normally gotten a 1/2 warrant thought they could get 1/3 warrant. But teams going forward should pay attention to today…unless you’re of Churchill II level or Haymaker II level or Conyers II level, you still need the SPAC guys and you still need to make them happy to sell the IPO. And the easiest way to make them happy is show them a successful first combination.