Promised Funding Means Nothing in SPAC Season of Discontent
(Bloomberg) -- SPACs, or special purpose acquisition companies, are struggling to collect previously committed cash in the latest sign of discontent in this once-booming corner of equity capital markets.
At least three SPACs closed their respective deals this month without all of the money private investors had pledged to contribute. While fickle capital isn’t ideal, the moves didn’t stop the strong market rallies of their targets: electric-vehicle battery metals startup TMC the metals co Inc., space infrastructure hopeful Redwire Corp. and renewable natural gas developer Archaea Energy Inc.
TMC has yet to receive the outstanding committed proceeds from the so-called PIPE placement, a representative said in an email. It “intends to seek to aggressively enforce” commitments, but also warned that they may not be successful.
“We raised $300 million of PIPE capital, which is consistent with the amount we have assumed in all of our public disclosures since the time the transaction was announced in April,” Archaea said in an emailed statement, referring to additional cash it raised beyond the initial fundraising commitments.
Redwire didn’t respond to a request for comment.
SPACs are empty shells when they go public, raising money with the intention of buying and merging with another company. Once they close in on a deal, SPACs typically announce another fundraising called a PIPE, or private investment in public equity. The size of the PIPE and the caliber of the investors can serve as an endorsement from Wall Street pros. This year’s 200 deal announcements contained roughly $55 billion in common stock PIPE capital, excluding convertibles, forward purchase agreements and other equity financing, according to data compiled by SPAC Research.
But a number of recently closed deals show how flimsy these financial promises from private investors can be.
Archaea Energy started trading on Thursday, days after its SPAC -- Rice Acquisition Corp. -- said that it had to raise an additional $25 million in a follow-on PIPE on the expectation that one of its initial PIPE investors couldn’t fulfill a commitment of the same size, according to SPAC deal documents. Redwire listed in early September with $85 million in PIPE financing compared to the $100 million announced in March. TMC received about $110 million in promised PIPE funding, a third of the initial $330 million commitment.
The broken pledges come in the wake of a steep drop in the SPAC Index from its February peak amid increased regulatory scrutiny and poor performance of companies post-merger. Earlier this week, Gary Gensler, the chairman of the Securities and Exchange Commission, assured Congress new regulations for the market are coming.
PIPEs are considered extra, but the nice-to-have funding is looking increasingly like need-to-have as SPAC shareholders are demanding refunds -- sometimes taking back almost all of the cash raised in IPOs. While these redemption demands for Archaea and Rice were low, nearly 91% of shares redeemed in the SPAC that took TMC public, leaving just $27.2 million of proceeds in the blank check’s cash trust.
Still, broken promises don’t necessarily deter other investors -- or meme traders. Despite broad market weakness, TMC surged as much as 37% on Thursday, Archaea jumped as much as 10% to a post-merger high and Redwire rose as much as 6%.
©2021 Bloomberg L.P.