The red-hot SPAC market is cooling off as first-day trading spikes evaporate
- 14 out of 15 SPACs that went public last week traded below their $10 IPO price.
- SPACs have raised $87.9 billion in 2021 alone and have over $1 trillion in purchasing power.
- Returns for SPACs 12 months after their mergers averaged negative 34% between January 2019 and June 2020.
The red-hot SPAC market looks to be cooling off as first-day trading spikes that were common in the space earlier this year begin to evaporate.
93% of SPACs that went public over the last week are trading below par value or $10 per share, per Dealogic data compiled by Reuters, That's 14 out of 15 SPACs this week alone trading below their IPO price.
The biggest first-day jump of a SPAC this month was just 3.5% for Supernova Partners Acquisition Co II Ltd on March 1.
That's compared to January's largest first-day pop of 32.5% for Altimeter Growth Corp II and February's best first-day jump of 24.9% for CM Life Sciences II, per Reuters.
SPACs are "blank check" firms that go public with nothing but cash on their balance sheet. Their sole goal is to merge with or acquire a private company allowing that business to skip the traditional IPO process to make its public debut.
There's no doubt the SPAC market is booming. SPACs have raised $87.9 billion so far in 2021, according to data from SPAC Research. That's already more than all of 2020 when SPACs raised $82.1 billion, per Dealogic.
The incredible rise of SPACs means the blank check firms now have over $1 trillion in spending power.
Unfortunately, the rise in SPACs hasn't always led to great returns for investors, especially retail investors.
According to data from "A Sober Look at SPACs" by Klausner, Ohlrogge, and Ruan 2020, average returns for SPACs 12 months after their merger were negative 34.9% between January 2019 and June 2020.
Billionaire investor Barry Sternlicht told CNBC on Wednesday he believes the SPAC market is "out of control." These days "if you can walk, you can do a SPAC," Sternlicht said.
The CEO and Chairman of Starwood Capital, which operates six SPACs of its own, warned about the lack of due diligence done by SPAC sponsors. Sternlicht also said the recent poor performance of SPACs is partly a result of a tech sell-off, because a lot of SPACs are tech-focused.
"People are also beginning to question the euphoria and retail investors are unable to keep up with all these names," Sternlich told Reuters.
Sternlicht isn't the only one questioning SPACs recent rise either.
UBS barred financial advisors from making SPAC pitches to clients due to limited availability of research on SPACs before their mergers with private companies. All of this bearish news may be weighing on SPACs' first-day results.