A slowdown in SPAC IPOs since March could in part stem from the $20 billion unraveling of Archegos Capital, according to a report from the Financial Times’ Ortenca Aliaj and Joshua Franklin.
Bill Hwang’s Archegos utilized extreme leverage from a number of banks to build ahighly concentrated stock portfolio that ultimately moved against the firm as it was unable to meet margin calls. That leverage unwind caused $10 billion in combined bank losses, with Credit Suisse and Nomura losing the most.
Following the late-March leverage unwind, banks are exhibiting more caution when extending leverage to hedge funds and family offices, according to the report. Less leverage has forced hedge funds to rethink their strategy when investing in SPACs, according to the report.
Hedge funds would often employ leverage to buy SPACs at the $10 offering price, and then immediately sell any pops to get out early and lock-in gains. That leverage would significantly help juice returns for hedge funds.
A senior banker who works on SPAC deals told the Financial Times, “A lot of the return profile for hedge funds is derived from the leverage they employ. It was a gravy train when it was levered.”
Now, less leverage being offered to hedge funds in the wake of the Archegos fiasco has coincided with a significant drop in SPAC IPO listings. Over the past month, just 13 SPACs listed, compared to 110 SPAC listings in March.
“We are seeing it in the price action where securities are trading below par because banks are not offering leverage as freely as they did and it’s now more expensive,” Matthew Simpson of Wealthspring Capital told the Financial Times.
An analysis of Refinitiv data by the Financial Times found that 80% of SPACs that are still in search of a deal are now trading below the $10 level, which is often the IPO price for the blank-check firms.
“All the rocket fuel has come out of these things. If hedge funds were allowed to lever up, hedge funds would be levering up to buy all the SPACs trading under $10,” Matthew Tuttle of Tuttle Capital Management told the Financial Times.
But the unwind of leverage being offered to hedge funds isn’t the only reason why few SPACs have gone public in recent months. Increased regulatory scrutiny of SPACs and an unwind in the high-growth tech trade have certainly contributed to a decline in SPAC offerings.