A hot trend in capital raising for the healthcare and life sciences industries only two years ago, SPAC deals have petered out, but are far from dead.
Two years ago, it was the hot trend in healthcare and life sciences capital raising. Now it’s petering out. Whatever happened to special purpose acquisition companies (SPACs)?
Healthcare Startups Choose SPAC Over IPO
Rather than deal with the regulatory hassles of an initial public offering (IPO), private biotech, digital health, and other startup, companies got together with institutional investors to form publicly traded shell companies called SPACs, aka, blank-check companies. Taking advantage of the less burdensome IPO process for such entities, SPACs would go public and raise capital on the public exchanges. Investors purchased shares of the SPAC, typically at $10 per share. In addition to low share prices, investors would receive free share warrants.
But the SPAC’s ultimate purpose was to seek out a desirable merger target. The SPAC would then merge with the selected target, with the new entity continuing to raise money on the public exchanges. If the investors didn’t like the target, they could redeem their shares but still keep their warrants.
The SPAC Craze Fizzles
SPAC deals in the healthcare space took off in 2020 and reached record highs in the first quarter of 2021, when 42 SPACs filed IPOs raising a total of $11 billion, according to S&P Global Market Intelligence. But then things quieted down. There were only 13 SPAC IPOs in the second quarter. Even though the numbers rebounded in the final months of the year, it appears that the SPAC craze has peaked.
Monthly IPO Activity for SPACs Targeting Health Care — 2021
Source: Recreated from S&P Global Market Intelligence. Data compiled on best-efforts basis on January 6, 2022. Includes IPOs completed between January 1, 2021 and December 31, 2021 by SPACs that disclosed health care as one of their intended target sectors in their IPO filing.
Part of the reason for the decline is supply and demand. The market can support only so many SPACs and traditional IPOs were bound to bounce back and restore some kind of equilibrium. The overall sluggish market and poor post-acquisition performance of many SPACs did little to keep the surge alive. Tech company valuations fell and financing became tight.
As SPACs rose, they also began to attract attention from unwelcome sources. In April 2021, the start of the decline, the U.S. Securities and Exchange Commission (SEC) issued a warning to SPACs that the warrants issued in connection with their IPOs may have to be listed not as equities but liabilities and that some SPACs would have to refile their regulatory statements. At this time, several high-profile SPACs became the targets of investor fraud lawsuits for violating the Investment Company Act of 1940 by failing to register as investment companies.
Takeaway
Despite the recent declines, relegating the blank-check company to the realm of Hula Hoops and Beanie Babies would be a major mistake. This is no passing fad, according to financial experts. The healthcare SPAC is and will remain a viable alternative to the traditional IPO for years to come.
