Special Purpose Acquisition Companies (Spacs) were very lucrative during the stock market boom, especially for their founders. After the turnaround in interest rates, their continued existence is more than uncertain.
Tidjane Thiam, former head of Credit Suisse, is trying to be a spac investor. The volatile market environment works against this once fashionable form of investment.
The second-round effects of the turnaround in interest rates are claiming more victims. In particular, investments in markets that have thrived in times of excess liquidity – for example the crypto sector – are getting crushed. Now that the difficult stock market year 2022 is coming to an end, the market for Spacs is also slowly drying up.
Spacs or Special Purpose Acquisition Companies are listed shell companies that collect money from investors in order to later merge with another company and go public. In times of cheap money, the Spac business was popular and lucrative. Even former US President Donald Trump wanted to gild his media business via the Spac transaction. Investigations by the US Securities and Exchange Commission in this specific case are extending the process well into next year.
Personalities with a connection to Switzerland such as the former CEO of Credit Suisse (CS), Tidjane Thiam, the Swiss Re President and ex-UBS CEO Sergio Ermotti or the CS board member Michael Klein were also drawn under the spell of the Spac trend . Klein, the future head of CS’s spun-off investment banking arm, is also considered one of Wall Street’s most successful spac deal-makers.
Spacs are extremely risky constructs, because at the time the funds are allocated, investors often do not know which company is to be taken over. The reputation of the staff behind these “blank check companies” is all the more important. Spacs are therefore to be seen as a bet on the skills and network of their management.
Party prematurely over
But now the party seems to be coming to an early end for many Spacs and their sponsors. Vehicles that have joined late are particularly struggling to find suitable takeover targets in the current volatile market environment. In addition, the falling share prices across the board make IPOs hardly feasible. Spac investors also have the option to withdraw their money from the vehicle before a certain deadline. Spac managers typically give themselves two years to find a takeover target.
Before the turnaround in interest rates, there was a prospect of a lucrative increase in value for all parties, as was the case initially with the IPOs of the e-car manufacturer Lucid Motors or the fintech provider Sofi, but these hopes have now evaporated. Especially since the technology companies, which were highly valued in the stock market boom year 2021, are suffering particularly badly from the rising interest rate regime: Lucid shares have lost 84 percent of their value since the beginning of the year, those of Sofi around 70 percent.
Not surprisingly, the number of Spac IPOs in the United States has dwindled to 85 from 613 in 2021. According to the industry information service Spac Research, 101 transactions were completed at the end of December and 126 Spacs were liquidated. Although 549 of these vehicles are still “active”, a large majority are still looking for a deal.
Thiam with new plans
The lousy market environment has not escaped Tidjane Thiam. The former head of CS had launched a spac called Freedom Acquisition after his not very glorious departure from the big bank because of the spying affair – also with capital from large investors and rich families such as that of the French billionaire and founder of the luxury group Kering, François Pinault. At its head was Thiam Adam Gishen, a confidante and former head of marketing from CS times. The Spac was listed in New York at the end of February 2021 and was able to earn 345 million dollars at the time.
Originally, Freedom was supposed to acquire a visionary company called Human Longevity. This was founded in 2013 by genomics pioneer Craig Venter and aims to combat age-related diseases by analyzing the genome of MRI scans and blood tests. However, the volatile markets messed up Thiam’s plans, and Human Longevity’s hoped-for IPO did not materialize for the time being. “We’re excited about Human Longevity, but they just aren’t ready to go public just yet,” Thiam told the Financial Times.
Instead, Freedom was merged with a solar specialist called Complete Solaria. The combined company is expected to be valued at $888 million. After the merger, Complete Solaria is to go public, which is planned for the first half of 2023. The stock market mood in the new year will have a say in whether it will come to that.
Meanwhile, Thiam has not given up on human longevity. With the same business partners as Freedom-Spac, Thiam has set up a new fund that invests in late-stage startups. The Free Tiger Fund is set to begin the next round of funding for Human Longevity. Raising funds for – often loss-making – startups is currently not exactly easy either.
Unperturbed Swiss
Switzerland was spared the Spac trend for a long time. Just one vehicle called VT5 was listed on the SIX a year ago. The vehicle, which is managed by the former CEO of the chip supplier VAT Heinz Kundert, has almost 200 million francs available for an additional purchase. According to a December report, they “dealed intensively with the search for a suitable partner” and looked at almost two dozen companies. Discussions were intensified with two companies.
Whether and when VT5 can announce a transaction is open. In view of the developments overseas, the investment form has lost much of its attractiveness. It remains to be seen whether it will survive rising interest rates in 2023. In this respect, Sergio Ermotti had better timing. The ex-UBS boss sits at Spac Investindustrial Acquisition Corp. before, which already merged with the Italian luxury fashion manufacturer Ermenegildo Zegna in the summer of 2021. When Zegna debuted on the New York stock exchange a year ago, it had a market capitalization of $2.4 billion. The shares have held up well since then.