The SPAC market remains a viable way for companies to access the public markets given challenging IPO market context
Treasury releases guidance on buyback tax and its implication for SPAC redemptions
SPAC IPOs have decelerated as the market faced the overhang of contracting valuations, regulatory uncertainty and the approaching SPAC maturity wall. The average SPAC IPO size has decreased from $280 million in 2020 to $140 million in 2022, down 50%, as a smaller size may increase target pool and improve merger dynamics. That said, SPAC teams are still closing deals despite a trend toward withdrawals and then liquidations in Q4.
“Despite a challenging backdrop, the SPAC market remained a viable way for companies to access the public markets and growth capital in a year when the IPO market was essentially closed,” said Don Duffy, President, ICR. “With clarity from the Treasury regarding the excise tax on buybacks and how it impacts redemptions, we expect 2023 will see a ‘normalization’ in the number of SPAC IPOs at 5 to 6 per month with a lower average deal size. We also expect to see an acceleration in merger announcements based on the number of SPACs that remain in market. In an environment where capital is scarce and deal execution is critical, it’s more important than ever to have an experienced advisor that can partner with sponsors and target companies to create value in a SPAC transaction through capital markets expertise, investor relations, deal communications, and public relations strategies.”
Calendar 2022 was the slowest year for IPO activity over the last thirty years with under $7 billion in IPO proceeds raised compared to a record $136 billion of IPO proceeds raised in 2021. The dearth of new issue activity is highlighted by the fact that four mega IPOs – TPG, Bausch & Lomb, Corebridge Financial and Mobileye – represented over 50% of the IPO proceeds raised in 2022.
“Elevated inflation levels not seen in over forty years, the historic level of central bank interest rate hikes and looming fear of a recession underpin the challenging market conditions in the near term,” said Michael Goldberg, who joined ICR Capital in 2022 from his previous role as the Global Head of ECM at RBC Capital Markets. “That said, follow-on and convertible debt activity picked up in the 4th quarter of 2022 reflecting investor appetite for investment opportunities in seasoned companies at appropriate valuations. Looking out into 2023, IPO activity is expected to pick-up mid-year following more information on corporate profitability, GDP, inflation and interest rates. Fortunately, there is a large backlog of companies ready to come to market once conditions improve.”
Redemption rates remained elevated over 2022 as participants weighed fluctuating valuations, limited financing availability and regulatory risks. As a result, sponsors continued to focus on mature businesses with limited funding requirements, however, these targets often had more complicated capital structures and sellers seeking partial monetization. Despite the challenging environment, sponsors with enough time to close a deal remain optimistic about 2023.
“In Q4 almost as many SPACs extended their maturities as liquidated early, a note of confidence about their ability to close compelling deals in 2023,” said Niren Nazareth, Managing Director, ICR Capital. “Given our unparalleled market reach, we have helped many teams think through the critical path to close a successful business combination given market conditions and capital structure complexity. In addition, we are actively advising SPACs and targets on managing post-merger liquidity risk to execute on their go-public business plan and satisfy potential liquidity needs.”
The US Treasury released guidance on the excise tax on December 27, 2022, which can be found here. The guidance clarified that SPACs completing a liquidation and dissolution would be exempt from the excise tax. Unfortunately, redemptions in connection with an extension vote or a de-SPAC merger vote are not exempt at this time. However, such redemptions may benefit from the netting rule which “nets” stock repurchased and reduces it by the fair market value of any stock issued. That said, the lack of clarity around the excise tax drove sponsors to pull forward their extension deadlines and liquidate early to avoid potential tax liability in 2023.
ICR is the largest advisor and communications consultant to SPACs, having worked on approximately 150 transactions since 2021. To obtain a copy of ICR’s Q4 2022 SPAC Market Update report, please click here.
Established in 1998, ICR partners with its clients to execute strategic communications and advisory programs that achieve business goals, build awareness and credibility, and enhance long-term enterprise value. The firm’s highly-differentiated service model, which pairs capital markets veterans with senior communications professionals, brings deep sector knowledge and relationships to approximately 1,000 clients across more than 20 industry groups. ICR’s healthcare practice operates under the Westwicke brand (www.westwicke.com). Today, ICR is one of the largest and most experienced independent communications and advisory firms in North America, maintaining offices in New York, Norwalk, Boston, Baltimore and Beijing. Learn more at www.icrinc.com. Follow us on Twitter at @ICRPR.
Brian Ruby, ICR, 203-682-8268, firstname.lastname@example.org