A crucial source of funding for blank-cheque company deals is drying up, pointing to a slowdown for one of Wall Street’s hottest products after a record-breaking quarter.
Advisers to special purpose acquisition companies, which float on the stock market and then go hunting for a company to buy, say they are struggling to find so-called Pipe financing to complete their planned acquisitions. Pipe is short for private investment in public equity.
Institutional investors such as Fidelity and Wellington Management have ploughed billions of dollars into Pipe deals since the Spac boom emerged last year, providing a route to the public markets for businesses ranging from established software and entertainment companies to speculative developers of flying taxis and electric vehicle technology.
But people involved in arranging the deals say Pipe investors are overwhelmed by the sheer volume of transactions and put off by rising valuations.
There’s only so much illiquid exposure investors are going to want to take
“There is a lot of indigestion,” said one senior bank executive. “The pendulum has swung to where if you’re in the market with a Pipe right now, it’s going to be really hard and painful. A Spac goes back into the ocean if you can’t get a Pipe done.”
Spacs raise money when they first list on the stock market but they typically require more capital to fund their acquisition. Large institutional investors also act as a form of validation of the target company’s business prospects and its valuation.
There have been 117 deals announced this year, but the growing backlog in Pipes could prove to be a big roadblock for the 497 blank-cheque companies that are still looking for a deal, according to Refinitiv data.
Only about 25 per cent of Spacs listed since 2019 have completed deals so far. Sponsors typically have two years to complete a merger, otherwise they have to return the capital they raised to investors.
Several market participants said the slowdown would lead to a “flight to quality” and put downward pressure on the valuations of acquisition targets, which have skyrocketed in recent months.
Almost all of the executives the Financial Times interviewed said they were seeing Spac deals recut to offer more favourable terms to Pipe investors. One said: “It’s called the buy side for a reason.”
Because Pipe investments are considered illiquid — the money is tied up at least until the deal closes and there may be a lock-up period after that — investors can usually get favourable terms. They can see the deal before it has been announced to the public and are almost always able to buy in at the Spac listing price of $10.
But earlier this year, Pipe investors were clamouring to get in on Spac deals. The group of institutions that backed Churchill Capital IV’s acquisition of electric carmaker Lucid paid a 50 per cent premium to the Spac listing price to get a stake, almost unheard of at the time.
The recent reversal has Pipe investors negotiating lower valuations for businesses, giving them larger stakes for the same amount of money, and better pricing terms.
“There’s only so much illiquid exposure investors are going to want to take,” said another bank executive who has worked on numerous Spac deals.
The Pipe slowdown is bad news for banks, which are unable to collect on advisory fees if they cannot sell a deal to investors.
It is also starting to affect the pipeline of Spac launches, lawyers and bankers said. In the first seven days of this month, only four blank cheque companies have gone public. That compares with 41 during the first week of March and 28 in February, Refinitiv data shows.
“Where we had been at a crazy, mad, rush pace in January and February, we’re kind of at a standstill right now on the IPO side,” said Ari Edelman, partner in Reed Smith’s corporate practice.
For those that already went public and are looking for a target, he added, “the hope is this is just a bump in the road. And then ultimately the deal gets done.”