Bloomberg Línea — Created in the United States more than two decades ago, special-purpose acquisition companies (SPACs), also referred to as a ‘blank check companies’, have become more popular among Latin American companies over the last two years.
Using a SPAC is a financial maneuver which speeds up the process for a company to go public. SPACs’ only function - after listing traditionally - is to find a target company and merge with it to take it public.
Latin America has seven SPACs, created during the growth of this type of vehicle over the last two years, and aimed to take advantage of record liquidity created by more than 40 unicorns in the region to merge with late-stage startups.
LatAmGrowth (LATGU) launched its IPO earlier this year, raising $130 million. MEKA (MEKA), the SPAC of Kaszek and Mercado Libre, raised $287 million on Nasdaq, and XPAC, the SPAC of broker XP (XP), raised $200 million on Nasdaq.
Valor Latitude also had a $200 million IPO on Nasdaq, as did DILA Capital ($50 million on Nasdaq) and SoftBank LDH Growth I ($200 million on Nasdaq). All of them are looking for a company in the region for a merger, which must take place within two years after the vehicle goes public. Otherwise, the SPAC dissolves and investors get their money back.
Only two SPACs have already announced a merger or have merged with a target company. Alpha Capital Acquisition announced at the end of last year that it would merge with Brazilian company Semantix. Before that, SPAC Andina Acquisition Corp I, which raised $42 million on Nasdaq, merged with Tecnoglass in 2013.
After a record 2020 with the merger of SPACs, the world of technology and finance seems to have changed quite quickly, and in 2022 the landscape for SPACs is much more complicated. As of mid-May, 66 SPACs had raised just $11.5 billion on U.S. stocks, compared with 317 that had already amassed $102 billion by 2021, according to data compiled by Bloomberg.
These merger machines, that created some of the world’s biggest new fortunes, are also responsible for one of the biggest implosions of wealth.
Arrival founder Denis Sverdlov, worth $11.7 billion a year ago, lost his billionaire status last month when shares in the electric-vehicle maker plunged after its merger with a SPAC.
The 94% drop in his net worth is the largest loss in the wealth of anyone outside of China who was in the Bloomberg Billionaires Index last year, surpassing even the 90% drop of Ernie Garcia III of Carvana, a second-hand vehicle online retailer with the same business model as Kavak, a Latin American startup valued at $8.7 billion.
Sverdlov’s collapse serves as a wake-up call on how SPACs can go from being a means of wealth creation to a means of destruction.
Even some banks that helped create the market for SPACs are now rejecting them over risk concerns.
Goldman Sachs and Bank of America have scaled back their involvement in the sector, pausing work on new SPAC vehicles while the U.S. Securities and Exchange Commission weighs up new rules for such vehicles.
“Arrival is dealing with the effect of the negative aura of SPAC companies,” said Susan Beardslee, principal analyst at ABI Research.
An Arrival spokesperson declined to comment.
Latin American SPACs in a Race Against Time to Go Public
Rafael Steinhauser is the patron of Alpha Capital’s SPAC. “Fortunately, ours was the first Latin American tech SPAC to announce a merger, and the first to go public,” Steinhauser said in an interview with Bloomberg Línea.
Alpha Capital announced its merger with Semantix, a Brazilian AI and data analytics company, in November 2021. Alpha Capital expects the transaction to close in June. “It will be the first Latin American deep tech company to be listed in the United States, because all the others are applied technology, they use technology to sell services, but they don’t create technology,” Steinhauser said.
He said Alpha’s SPAC will be able to go public next month because when the SPAC signed the merger agreement, a PIPE (private investment in public equity) was also made in addition to the $230 million raised by the IPO. A PIPE is a way in which SPAC protects itself by being able to carry out the transaction if investors withdraw the money from the vehicle, either because they did not like the target company or because of market conditions.
“We never imagined that we would have as many investor bailouts as today, where there are 80-90% bailouts,” Steinhauser said. “When you have so much redemption and you don’t have anyone to give you money for a PIPE, because that has dried up as well, you hit minimum cash. It is not enough to compose the transaction to go public”.
A Bucket of Cold Water for SPACs
Rising interest rates are one reason for the slowdown in SPACs, according to Steinhauser. Under current rules, the amount invested in a SPAC cannot be applied to interest. Therefore, investors believe that investing money at higher interest rates earns more than with a SPAC.
The second reason is that the SEC is considering changing the rules for SPACs. “The rules are so serious that everyone got scared, especially the banks because one of the rules says that whoever goes public with a SPAC is also jointly responsible for the d-SPAC (public company after the merger). And for a bank to be co-responsible for a company that it does not know, because it does not know the target company, is very serious”, Steinhauser said.
A person familiar with the matter and who requested anonymity because the discussions are private explained that in an IPO banks cannot make projections, since such business projections could be attributed to the bank, and it could be sued if the company does not comply.
In SPACs, the bank is not responsible for due diligence, and investors are called “big boys” because they bear the due diligence risk. But now, the SEC is considering changing the rules so that the bank could be responsible for the company with which the merger was carried out, and, therefore, the business projections that are made today in SPACs to attract investors to the operation cannot be performed if the new rule is approved.
The SEC’s public consultation on the new rules lasts for two months and could spell the end of SPACs as they are known today.
“I think there will still be SPACs, but since we are at this impasse in the regulatory discussion, added to the interest rate, everything has stopped. Ours did not stop because we are guaranteed this PIPE, but if it were not for that, we would enter like the others,” Steinhauser said.
MEKA raised enough in its October 2021 IPO to take a large company public, as well as having a PIPE.
“If we found a company that was smaller, we would certainly choose that company, but we want to keep our options open, so we haven’t defined a specific size, but the capital raised was quite significant,” MEKA sponsor Hernán Kazah said in an interview with Bloomberg Línea earlier this year.
“He wished to know that a more volatile market was coming, but we had no idea this was going to happen,” Kazah said.
-- With information from Bloomberg News