IPO Market Cools as SPACs Face Downturn

The special purpose acquisition companies still remain a significant part of M&A momentum.

Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

As vaccines continued to roll out, M&A activity, equity offerings, and IPOs all got a boost during the first quarter, thanks largely to the boom in SPAC deals.

These blank check companies proved to be an indispensable asset to the overall recovery, particularly in the U.S, according to S&P Global’s first quarter report on M&A and equity offerings. But as SPACs are headed for a downturn, the IPO market may also be cooling.

The report, published on Thursday, states global equity issuance has soared by 234.5 percent to $348.09 billion in the first quarter from the same time a year ago; while global IPO activity has jumped 448 percent to $204.74 billion, with most of the growth concentrated in the U.S. The total value of IPOs in the U.S. increased by nearly 900 percent over the same period.

But as companies grapple with new regulatory guidelines, SPAC issuance has slowed in May (from its first quarter peak of 278 transactions). Enact Holdings, hear.com, and Zenvia postponed their IPOs, while Squarespace saw its price drop on its first day, according to the report.

SPACs Drove the Market and Continue to Support M&As

Over the past year, SPAC deals played a key role in the IPO boom in the U.S., according to the report. “At the start of 2020, the market for U.S. SPAC IPOs was sparse, with just 12 deals raising $3.87 billion in the first quarter, but the market was much different in 2021 as those totals were surpassed in the year’s first full week, which saw the pricing of 26 SPAC IPOs that raised $7.26 billion.” The total number of blank-check IPO transactions increased to 278 in the first quarter from a mere 12 over the same period last year.

As U.S. equity issuance activity increased during the toughest months of the pandemic, execution of traditional IPOs became more “challenging,” the report noted. According to Joe Mantone, one of the authors of the report, any economic uncertainty, like the one faced during the pandemic, also makes traditional IPO execution difficult. But SPACs were a different story: Investor demand was diverse, with household names in finance, politicians and athletes all taking part in them.

As for the future of SPACs, the capital raised has added “dry powder” to the market, which will help maintain M&A activity.

“Even though we’re seeing a slowdown in the growth of new SPACs, there’s plenty of SPACs that have raised capital already that can execute M&A, which should help,” Mantone said.