The SPAC market has been battered in epic fashion. The SPAC Index is down 47% from its peak and issuance has ground to a halt. There were 298 SPAC IPOs in Q1 21 – the number fell to 53 in Q1 22 and, in the past six weeks, there have only been 13 SPAC IPOs.
We see two main reasons for this:
The Tech rout. SPACs have been concentrated in Tech, Electric Vehicles (EV) and BioTech and the Tech rout this year has taken the spark out of the SPAC market, with the NASDAQ down 25% YTD and the biggest SPAC issue (ASEAN Tech giant Grab Inc. at US$40bn) collapsing – down 80% from its IPO.
Accounting changes. The SPAC Index has also fallen sharply due to changes in accounting treatments. On 12 April, the Securities and Exchange Commission (SEC) announced that SPAC warrants should be treated as liabilities rather than equity, as previously. The SPAC frenzy came to a screeching halt with this announcement – around 170 of the 200 SPACs had to restate their accounts.
However, we think SPACs could now present an alluring opportunity:
There are US$162.9bn of uninvested SPAC funds. According to our estimates, two-thirds of this could be allocated in the Tech sector. The collapse in the Tech valuations may create opportunities for bottom fishing.
EM Tech could be a profitable area for the SPAC market. In emerging markets, financial centres such as Singapore, Hong Kong and Dubai have created frameworks for SPAC issues – they did not have regulatory regimes for SPACs prior to this. Some of EM Tech firms (or "Baby Amazons" as we know them) have lost 80% of their value since their peak, which is also reflected in the valuation of unlisted Tech companies, such as Traveloka. According to Deal Street Asia, projected EV/sales valuations have fallen by over 50% since the start of the year.
Tech unicorns in ASEAN are ripe for SPAC listings, as the traditional IPO route does not favour them. Traditional IPOs require a long operating track record, but tech unicorns are typically unprofitable and thus get ignored.
Overall, there are 717 SPACs looking for deals and c600 are trading at a discount to their par value. According to SPAC Research, investing in the struggling sector could yield US$3.5bn.