Why Has the SPAC Market Cooled Off So Fast?

In some weeks so far in 2021, more than 30 new SPACs (special purpose acquisition companies) have come onto the market. More than 400 of these blank-check companies are still looking for deals. However, there's been a plunge in recent weeks, in both the number of new SPACs being created and the valuations of existing SPACs in the market.

In this Fool Live video clip, recorded on April 5, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss why the SPAC market has gone from hot to ice-cold so quickly.

Jason Moser: Matt, it feels to me like the SPAC craze has slowed down a good bit. Is that just me?

Matthew Frankel: It came to a crashing halt.

Moser: There have been no headlines. For a month or two, it was just SPAC, SPAC, SPAC. It was nothing but SPAC 24/7. That really seems to have all but died down. What's going on?

Frankel: Let me read you a couple of data points here. Just doing a quick look on my TD Ameritrade [Editor's note: a subsidiary of Charles Schwab] account before we jumped on here. There are no new SPAC IPOs [initial public offerings] scheduled for this week. There was one that went public last week. The week of March 15, there were 24. The week of March 8, there were 23, and the week of March 1, there were 36.

Moser: Wow.

Frankel: That went down to one last week and zero this week so far. That's why I say it didn't just slow down, it came to a screeching halt.

Moser: Yeah.

Frankel: Not just the number, the price action really shows that the market has been flooded with these. If I add those together, let me do a quick count; I'm sort of a math guy. Roughly 75 SPACs went public in March, and out of those, most of them are trading at or below their net asset value, which was $10 a share. That's what a SPAC goes public for. The highest I saw was $10.10. Not only are they really not getting as much investor attention and going public as frequently, they are not trading at these premiums we saw. If you remember, some of them were trading at huge premiums before they even had a deal.

Moser: Yeah.

Frankel: Those have really cooled off. We did our SPAC series here recently, so just to name a few from there. The two are Chamath [Palihapitiya]'s SPACs that have not found done deals yet. IPOD [Social Capital Hedosophia Holdings IV (IPOD)] and IPOF [Social Capital Hedosophia Holdings VI (IPOF)] are both down 40% from their recent highs. They didn't have deals then, they don't have deals now; it just really cooled off. They're not trading for as big of a premium anymore. They were trading for $17 or $18; now they're trading for about $11. Remember, they have $10 a share in assets sitting in a trust account.

Moser: Yeah. I was going to say: At some point, if they don't find that deal to bring to the market, you get that $10 back, ultimately. That's the baseline.

Frankel: Right. The premium has just evaporated here. Bill Ackman's Pershing Square [Tontine Holdings] (PSTH), that's the one that people are really optimistic about. That's down 27% from its highs. Even the ones that the deals were announced have cooled off. We've talked about Lucid; Churchill Capital IV (CCIV) is the one taking Lucid public. That's down 64% from before it announced the deal. The 23andMe, a Virgin Group acquisition, VG Acquisition (VGAC) -- down 44 percent since the deal was announced. SoFi [Social Capital Hedosophia Holdings V (IPOE)], the one that we talked about and we really like -- down 40% from its highs.

We've seen the number of SPACs going public go down, we've seen the premium that new SPACs are trading for completely evaporate. And we've seen even the ones that the market have really given headlines to over the past month or so, they're really cooled off as well. There's still over 300 SPACs in the market looking for targets.

Moser: Wow.

Frankel: There's billions and billions of dollars of capital waiting for companies to take public. It really looks like the market has just been flooded, and it just caught up to it really fast.

Moser: Yeah. And I wonder, too, when you think about these SPACs and the nature of so many of these businesses: They come public so much earlier than they normally would -- in many cases, pre-revenue or very modest amounts of revenue, $20 [million], $30 million, you're talking very modest amounts.

With SPACs, it really does seem like it's less about fundamentals and more about the psychology behind it -- the excitement, the potential, the growth. Just as you were saying with Upstart, for example, really, that growth: They need to make sure they can show that growth that really backs that valuation.

To me, I wonder with SPACs, as we start to reopen more fully, as people start going back to work as they did before...we're becoming a little bit less virtually tied and a little bit more real-world-based and out doing other things now. I wonder if maybe that psychology starts to wear off a little bit, that interest starts to wear off a little bit, just because, first off, you said so many have already come to market. There's only so many good ideas out there to begin with, but then also maybe people aren't looking and listening to this stuff. They aren't looking to the stuff and listening to it like 24/7, as maybe a lot of people have been over the past year.

Frankel: Yeah. At some point, the appetite for speculation starts to run out.

Moser: Yeah. That's a good way to put it.