Third Quarter of 2022 SPAC Review

An In-Depth Look at SPAC Activity Throughout the Third Quarter and Year-to-Date

Below is a summary of SPAC performance in 2022 year-to-date.

Now that the third quarter of 2022 has come to a close, we take a look back at year-to-date activity. Market conditions tied to inflation, Fed rate hikes, and geopolitical risk have all exerted their influence on the markets this year and anxiety continues to climb ever higher. However, regulatory risk thanks to the SEC’s final SPAC rule proposal, which is due any day now, promises fresh challenges.

Q3-2022 SPAC IPO Count and Total Gross Proceeds Raised by Month

Looking back at the third quarter, new SPAC issuance slowed to a trickle with only eight new IPOs priced raising a total of $678 million in gross public proceeds. This is a vast change from the third quarter of 2021, which priced 89 SPACs and raised $17.6 billion. This represents a -91% decrease in issuance when comparing Q3 2022 to Q3 2021.  By this time last year, SPACs had priced a total of 447 IPOs total, whereas in 2022, only 77 SPACs have made it to market year-to-date.

Notably, the month of July did not see any SPAC IPOs price. The last month to see zero SPAC IPOs was February 2017, more than five years ago.

Nevertheless, market conditions have been extremely challenging and nearly all asset classes have been affected. By way of comparison, Traditional IPOs have only priced 50 deals year-to-date 2022, a drop of -81.3% from their 2021 Q1 through Q3 total of 268 traditional IPOs priced (note: we do not track uplists, ADRs, or unit IPOs on IPOInsider).

YTD SPAC IPO Day-1 Trading Performance

Evaluating IPO performance is challenging with so few deals priced, however, there has been a nominal improvement in the average day-1 trading VWAPs in the third quarter.

To measure IPO performance, we looked at the difference in day-one VWAPS and % held in trust (NAV) to arrive a percentage above or below NAV. April IPOs traded have had the best performance of the year (to-date) with an average day-1 trading price down -1.23%. The worst month in 2022 so far has been June at -2.35%, which was followed by zero IPOs in July. However, keep in mind that the larger equity capital markets in June was marked by extreme volatility.

The pending new SEC SPAC rule proposal has also had a dampening effect on issuance as teams wait to understand what the final rule framework entails. However, the scarcity of new issuance in the third quarter possibility resulted in increased demand, which is potentially what is responsible for the slight improvement in day-one performance seen in August and September.

Note: We register SPAC IPOs to be included in a quarter or a month by trading day. For example, if a SPAC prices on March 31st and begins trading on April 1st, the SPAC will be included as a Q2-2022 SPAC.

YTD 2022 New S-1s and Registration Withdrawals / Abandonments by Month 

Throughout Q3, SPACs saw just 10 new S-1 registration statements with an average offering size of $102.7 million. The average time horizon was 13.2 months (not including any auto-extensions), with the average warrant coverage sitting at 3/4, or 0.75. The average percentage held in trust was 101.5% or $10.15 per unit. Of the 10 new S-1s in Q3, four offered rights coverage, three of which were offering 1 for 1/10 and one offering 1 for 1/20.

Comparatively, there were 26 new S-1s in the second quarter of this year with an average offering size of $100.4 million, and 36 in the first quarter at $142.7 million.  For reference, the average IPO size in FY 2021 was $229.7 million, so the trend has been much smaller sized SPACs.

Additionally, you’ll notice that the pace of Registration Withdrawals and Abandonments has slowed somewhat in the third quarter with 37 total, but this is on the heels of 62 Registration Withdrawals and Abandonments recorded in the first quarter and 57 in Q2. In total, 156 SPACs in 2022 have filed to withdraw their registration statement or were declared “abandoned” by the SEC. This leaves the current number of SPACs on file to IPO at 108, which is significantly down from the 272 S-1s on file we had at the start of the year.

As a result, we might have some additional SPACs that file to withdraw in Q4, but the vast majority have already been withdrawn so we shouldn’t see large numbers going forward.

YTD and Q3- 2022 Registration Withdrawals (RWs) and Abandonments by Underwriter

Additionally, of the SPACs that have previously withdrawn or were abandoned, these SPACs had an average offering size of $256.3 million, 22.7 months duration, 0.32 warrant size, and 100.2% in trust, or $10.02 per unit. These are terms typical of tier-1 teams in 2021, not 2022. Clearly the teams that pulled their registration statements did not want to adjust their terms to price in this market and as a result, would rather remove their S-1s entirely.

As a result, it should also come as no surprise that we see the majority of the abandonments coming from underwriters that previously topped the league tables in deal count for 2021 and worked with the tier-1 teams.

Credit Suisse leads with five in the third quarter and 27 total year-to-date. Goldman Sachs, is a distant second with two deals pulled in the third quarter and 18 year-to-date. You’ll also notice that the top 10 underwriters that have had SPAC teams file to withdraw or were declared abandoned are all bulge bracket banks, with the exception of Cantor Fitzgerald.  Again, most likely these banks were working with Sponsor Teams that did not want to amend terms to clear the current market.

YTD and Q3-2022 SPAC IPOs by Underwriter

Despite SPACs pricing only eight IPOs in the third quarter, EF Hutton managed to price five of them. EF Hutton also leads the year-to-date numbers with 16 SPAC IPOs priced or 21% of all 2022 pricings. Cantor Fitzgerald and Maxim Group are tied at second with six a piece, but neither priced an IPO in the third quarter.

The other three IPOs priced in Q3 came from Ladenburg Thalmann with the $69 million Hainan Manaslu Acquisition Corp. (Nasdaq:HMAC) and Qomolangma Acquisition Corp. (Nasdaq: QOMO).  Needham & Co. recently priced the $75 million dMY Squared Technology Group (NYSE: DMYY).

YTD 2022 SPAC Deal Terminations

2022 year-to-date SPACs have seen 45 definitive merger agreements terminated. Eight of these have subsequently liquidated their SPACs, but another seven have gone on to announce a second deal and are currently in the announced column. The remaining 30 are currently searching for a new target company.

Looking at prior years for comparison, 2021 saw 17 SPACs terminate a definitive agreement, four of which ultimately liquidated.  2020 on the other hand saw a total of 6 SPACs terminate, all of which went on to find a second deal and complete a combination.

YTD 2022 SPAC Liquidations by Month

As inflation proved difficult to control and market conditions deteriorated, SPAC liquidations started to escalate. There were a total of 21 SPACs that opted to liquidate in the third quarter, a noticeable increase from Q2’s seven and Q1’s sole liquidation. To-date in 2022, there have been 29 liquidations in total.

However, these numbers do not include Crucible, Nightdragon, or Liberty Media, which have all filed proxies to hold shareholder votes to move up their deadlines so they can liquidate early.

Looking ahead to the fourth quarter, we expect the trend to continue with a further escalation of liquidations thanks to the 1% excise tax for share buybacks. The excise tax goes into effect starting January 1, 2023, so for any teams struggling in the current market conditions to find a deal and were already considering a liquidation, this might tip them into doing that in the fourth quarter of 2022. As a result, the number of liquidations should increase as we get closer to the end of the year.

As mentioned above, we already have three SPACs that have all filed proxies to hold shareholder votes to move up their deadlines so they can liquidate early – Crucible, Nightdragon and Liberty Media.  Note that these will not be included in any “liquidated” numbers until they achieve a yes vote to do so.

Searching and Announced SPACs Expiring by Month

We’re only at the beginning of the fourth quarter of 2022, but the first quarter of 2023 is weighing heavily on investors’ and sponsors’ minds alike.  That’s because as you can see we have an enormous number of SPACs hitting their completion deadlines in January, February and March totaling 314. However, we’ve included the number of SPACs with “auto-extensions”, which somewhat mitigates this “wall of expirations”.  However, with the December 31st 1% excise tax deadline looming, we are anticipating a good portion of the Q1-2023 SPACs opting to liquidate early instead.

Naturally, we anticipate the vast majority of any early liquidations to come from the searching SPACs. As you can see above, 95% of the 551 currently searching SPACs have yet to extend their current deadlines, whereas 42% of the announced SPACs have needed to extend. With a deal in hand and a “sunk cost” of funds contributed to trust to extend, the announced SPACs are naturally more motivated to continue pressing forward.

The Terms Diffusion Index

As shown above, the Terms Diffusion index has been consistently retracting off of the 50.0 level, showing that terms changes remain very light. The third quarter of the year has produced an average index reading of 49.77 with a maximum of 50.0 and a minimum of 49.50. These numbers are much higher and less variable compared to what we saw in Q1 this year which had an average of 49.69, a maximum of 50.07, and a minimum of 49.02. As this quarter’s Terms Diffusion Index somewhat experienced a “flatline”, it remains difficult to determine the risk appetite of investors since terms have reached somewhat of an equilibrium.

To demonstrate the lack of changes that resulted in the less active graph above, we can look at total quarterly term changes. The first quarter of 2022 had 116 total term changes with 102 negative changes and just 14 positives. In comparison, the third quarter produced just 44 total changes to terms, 41 of which came from negative amendments, and just three from positive. The drastic decline in the number of amendments highlights the unfavorable market conditions that have developed throughout the year.

Taking a look at the same period last year – Q3 2021 – we see an even larger change. The average index reading for Q3 2021 was 49.58 with a minimum of 48.83, and a maximum of 49.87. Although this shows a lower maximum index for Q3 2021, we can see there was clearly a period of tightening in deal terms. The same period experienced 201 total term changes, 15 of which came from positive amendments to terms and 186 from negative.

As we head into the fourth quarter of the year, we can expect the Terms Diffusion Index to follow the same trend as Q3. This means we are likely to see a continued lull as developing geopolitical issues, anticipated SEC regulations, and economic stability will weigh heavily on SPAC terms.

Summary

While the third quarter of 2022 was extremely challenging for SPACs, it’s not solely due to macro economic conditions. What has been weighing heavily on SPACs is the waiting period for a new rule framework from the SEC.  Without a final SEC rule proposal, SPACs have been stuck in a proverbial waiting room, or purgatory, but the fourth quarter should offer some relief. Anticipation is high for the SEC to release its final framework at some point in October, providing some guidance for bankers and lawyers to work with for any new SPACs.  As a result, expect to see some much needed innovation and new terms post-final SEC SPAC rule.

Additionally, you can be sure December’s calendar will be heavy with votes of all kinds – completion, extension, and early liquidation – as teams race the December 31st excise tax clock. December is typically busy for SPACs, but 2022 might break some records for most votes in one month. But, on the whole this should be looked at as a positive since it will clear the runway for 2023.  And in true Darwinian fashion, only the strong will survive.

Until then, it’s going to be rough fourth quarter and attrition will be high. After the highs of 2020 and 2021 and the lows of 2022, a more normalized 2023 would be most welcome.