SPACs are still profitable, but their future is bleak

This year, while the value of SPAC deals has fallen sharply from record highs in 2021, they represent an even larger share of the underlying IPO (initial public offering) market, according to DBRS.

With many deals on hold due to heightened market volatility, SPAC deals have accounted for 74% of total IPO proceeds so far this year, compared to less than 50% last year.

However, the value of these transactions has decreased significantly. Since the beginning of the year, SPAC operations have generated only US$9.6 billion (US$B) in total revenue, compared to US$92.5B in the same period last year.

Large investment banks around the world remain the main beneficiaries of this type of operation, “which could offset the loss of income resulting from the market volatility created by the Russia-Ukraine conflict”, specifies DBRS.

Indeed, while SPAC volumes are down this year, the report notes that banks will continue to record revenue from these transactions over several years.

“Banks will generally earn an initial underwriting fee by completing the SPAC IPO, with the remainder of the trailing fee being paid upon deregistration of the SPAC,” the report said. There may also be follow-on funding, which generates additional underwriting revenue.

In the short term, global banks are likely to continue to benefit from the rise of SPACs, the report suggests.

“As many issuers are reluctant to issue traditional debt and equity securities and delay merger and acquisition activity due to market volatility stemming from the Russia-Ukraine conflict, banks could be able to offset some of this revenue loss in the short to medium term with additional commissions from this very active SPAC pipeline,” the report states.

However, this should not last.

“With regulation of the SPAC market set to intensify in the near future, it is likely that we will begin to see this sector gradually dry up,” the report said.

Regulators want to tighten the rules because of concerns about SPAC structures for investor protection, including potential conflicts of interest between deal sponsors and investors.

Securities and Exchange Commission (SEC) Chairman Gary Gensler has called for new rules to ease the disparities between the regulation of traditional IPOs and SPACs, DBRS said, and tougher rules could lessen their appeal.

“If regulatory requirements between traditional IPOs and SPAC IPOs are equalized, it is likely that the SPAC bubble seen over the past two years will subside,” the report adds.

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