Investors in blank cheque vehicles are set for a liquidity boost of up to $75bn over the next six months as special purpose acquisition companies that went public at the height of a listings boom are forced to return their cash.
The expected surge in Spac liquidations will remove some of the last remnants of one of the most extreme market frenzies of recent years while giving a welcome injection of cash to many investors who have been hit by losses in this year’s broad market downturn.
Spacs aim to use the proceeds from a stock market listing to hunt for private companies to take public, but most have a two-year time limit to close an acquisition before they have to return all the raised funds to investors if they do not seek an extension.
Almost $75bn worth of Spacs are due to hit their expiry date between now and the end of February, according to data from Spac Research, with a further $36bn to come in March.
“It’s bullish for the market, the money will go back to the equity market overall because there are no Spacs to go back into,” said one senior banker who has helped blank cheque companies raise cash and find deals.
Investors have sunk more than $250bn into blank cheque companies since the start of 2020, but enthusiasm has waned after a series of high-profile disappointments and a crackdown by regulators.
Hedge funds were among the biggest investors in Spac IPOs. Some invested through multi-strategy vehicles, while others set up dedicated funds. One senior prime broker said money invested through these funds was likely to be returned to limited partners such as pension funds and university endowments. Multi-strategy funds, meanwhile, will be able to redeploy the cash into other areas — or meet redemption requests from backers who have been spooked by losses elsewhere.
Hedge funds have on average outperformed the S&P 500 so far this year but performance still fell by an average of 6.8 per cent in the second quarter, according to Citco, with investors withdrawing a net $7.8bn.
“Spacs that didn’t find a deal have outperformed most strategies outside of macro and [quant] strategies this year,” the broker said. “We do see an increase around investor redemptions, so this could help support some of those.”
“They’ll be delighted to have the cash and thrilled they didn’t put it to work in tech,” said one capital markets lawyer. “The Spac ‘forced savings account’ may well have been the luckiest investment many of them ever made.”
Some of the windfall for investors may come sooner than scheduled as they look to avoid being hit by new tax rules.
The majority of Spacs are based in the Cayman Islands, the Caribbean tax haven, but a minority are incorporated in the US state of Delaware. Lawyers fear that the wording of a new tax on stock buybacks could also apply to redemptions from Delaware-based Spacs, giving an extra incentive to redeem any funds before the tax comes into force in January.
Spacs that know they will not find a deal can call a special shareholder meeting to unwind early. Others may ask investors for extra time to get a merger over the line, such as Digital World Acquisition Corporation, which plans to merge with Donald Trump’s Trump Media & Technology Group, but doing so gives investors a chance to redeem their shares.
Even those that do strike a deal may have to return the bulk of their IPO proceeds to shareholders who can opt to redeem their shares rather than receive stock in the newly merged company.
The median redemption rate on mergers that closed in the past three months was 91.7 per cent, according to Spac Research.
“Many investors prefer to redeem and get back 100 cents on the dollar while holding on to their warrants as risk appetite is significantly lower than before,” said Mark Brod, a partner at law firm Simpson Thacher.
Brod added that, thanks to the recent stock market declines, even investors who approved of a Spac’s merger could choose to take back their cash with the expectation that they could buy the combined stock at a cheaper price in the secondary market afterwards.
