Could this be the end of SPACs?

After a pandemic-driven frenzy in companies going public through special purpose acquisition companies (SPACs), interest in the once-buzzy financial instrument is sharply declining. More stringent regulations around new SPAC transactions, poor performances in recent SPAC debuts, and a challenging macroeconomic environment have left many investors wary of SPACs and has pulled back the curtain on scores of overvalued tech stocks.

Over before you ever knew what they were? Head to our explainer on SPACs if we’ve lost you.

The SPAC market is crashing and new transactions are being left stranded: After a record year with more than USD 162.5 bn raised on US exchanges in 2021, the SPAC market has crashed. One SPAC index has fallen by some 22% over the past three quarters, Bloomberg reports. Over 600 SPACs are currently up in the air, struggling to land merger partners before going public, and in January alone some 20 US companies abandoned their bid altogether, CNBC reported, citing equity analysts. In the first five months of the year, some 95 planned SPAC transactions that would have raised a combined USD 26 bn have been scrapped, including “30 SPACs seeking to raise over USD 8 bn [that] have been abandoned by sponsors without even alerting the Securities and Exchange Commission to their change of plans,” according to Bloomberg data. The figure also includes 65 sponsors that formally withdrew their SPAC plans worth some USD 18 bn.

Did someone say “tanking US SPAC market”? Some 25 companies that completed SPAC mergers in 2020 and 2021 have issued “going-concern” warnings, which indicates that they are likely to go bust within 12 months, the Wall Street Journal reports, citing data from Audit Analytics. That’s more than 10% of all the SPACs that listed during the so-called SPAC boom, with many startups — including several EV makers, scooter-rental company Helbiz, and glass window maker View — missing their forecasts so far. Shares of companies that listed through SPACs in 2021 alone were down 59.5% on average as of 24 May, according to analysis from University of Florida researchers.

Homegrown darling Swvl looks like it’s facing much of the same hurdles: Mass transport app Swvl, which went public on the Nasdaq via a de-SPAC merger with Queen’s Gambit Growth earlier this year that valued it at USD 1.5 bn, has seen its share price plunge from late April highs of USD 10.09 to its current USD 5.05 valuation. The company’s shares are down 49.0% since its listing in March.

A symptom of Swvl’s woes: Significant downsizing of its headcount: The company said last month it is laying of 32% of its staff (around 400 jobs) in a bid to cut costs and turn cashflow positive by next year. This shift towards profitability has become important to the company in light of the powerful headwinds currently affecting global markets, CFO Youssef Salem told us at the time.

Their immense popularity over the past two years is part of the problem: Incredibly high demand for SPACs in 2020 and 2021 is partially responsible for artificially inflating many of these transactions, the Wall Street Journal said, citing analysts. Only now have these overvalued companies had to reckon with market realities where their performance falls short of drummed up expectations.

Loose regs on performance projections have also contributed to this performance gap: Part of the allure of going public via SPAC was that companies were less restricted in their future earnings reports than typical IPOs, which often led to over-exaggerated projections.

New regulations issued by the SEC set out to bring things under control: The SEC earlier this year announced a new set of rules for SPAC transactions that were intended to “improve the usefulness and clarity of the information provided to investors” and “to enhance investor protections.” They set out to do so through restrictions on future projections, increasing sponsor liability and allowing for legal action to be taken against false claims made by these companies.

But it seems that these rules have only turned more companies away: SPAC underwriting giants like Goldman Sachs have announced that they would be dramatically reducing their involvement with SPACs they helped take public since new SEC guidelines that put underwriters at higher liability risk and require SPACs to offer more info on conflicts of interest.

But this all coincides with a larger downturn in the stock market — partially because of global trends: Tech companies’ stock shed some USD 1 tn in value last month. Other indicators are showing terrible market conditions too: The S&P 500 is down 1.6% year-to-date, while the Nasdaq Composite is down 2.5% YTD. Snap, which saw its shares plummet 43% last month after announcing that the company will be missing earnings targets, has blamed inflation, high interest rates, supply chain challenges and Russia’s war in Ukraine for its performance. The company’s shares are now down 68.9% YTD. Google parent company Alphabet’s shares are also down 21.0% YTD, while Facebook parent company Meta is down 43.7% YTD.

As for SPACs, the worst is still yet to come: “The bottom is not in yet, because you have too many SPACs chasing too few [transactions]; that has got to resolve itself,” said Matthew Tuttle, CEO of Tuttle Capital Management, which tracks SPAC returns, told Bloomberg.