Europe's largest asset manager, Amundi SA, has exited most of its positions in special purpose acquisition companies due to soaring valuations that were "impossible to understand and rationalize," the France-based firm's deputy chief investment officer, Vincent Mortier, told S&P Global Market Intelligence.

SPACs — blank-check companies that raise capital through an IPO to acquire an existing private company — drew enormous market interest, primarily in the U.S., in the second half of 2020 and early 2021, resulting in a swarm of new listings and close to $200 billion in funds raised to date. However, market euphoria has eased during the second quarter amid growing uncertainty about equity valuations and increased regulatory scrutiny.

After challenging the warrant accounting practice of SPACs in April, the U.S. Securities and Exchange Commission is now looking into further guidance regarding SPACs' growth projections, which are often seen by critics as too optimistic or even misleading. Institutional investors have started to back out of SPAC deal financing due to the overwhelming number of companies looking for acquisitions and bloated valuations, the Financial Times reported in early April.

This shift in sentiment resulted in both the number of U.S. SPAC IPOs and the volume raised plummeting in April and early May from record highs in the first quarter, S&P Global Market Intelligence data shows.

'Toxic' market

With over 400 SPACs looking for targets, investors are getting nervous, especially after the initial craze drove SPAC stock prices to record highs before an actual acquisition was made, according to Amundi. There is no reason to double or triple the value of the SPAC itself because it is a blank-check company and there is no deal, Mortier said. "It was very puzzling that you had such a price appreciation based on nothing," he added.

Mark Hawtin, an investment director at Switzerland-based asset manager GAM Holding AG, echoed Mortier's comments in a recent note to clients, saying the tangible value of most SPACs before they identify a target is less than $10 per share, but buying frenzies have led to a multifold jump in prices.

SPACs have quickly become emblematic of a "boom-to-bust" market dynamic with "too much speculation, lots of greed, and investments becoming increasingly questionable," Mortier said, adding that what happened in 2020 and early 2021 was "toxic in a way."

Amundi took part in the initial SPAC boom but eventually cut its exposure to only a few positions and a "symbolic" invested amount. SPACs can take up 5% or 10% of investments, "but they cannot be the heart of the portfolio," Mortier said.

As a long-term investor, Amundi typically backs a merger with the idea to "stick around" for years. However, with SPAC prices skyrocketing, it was hard to imagine that valuations could grow much more in the future. "We invest the money for clients in a fundamental way, so the idea is not to participate in the hype and fuel it. … We took a step back," Mortier said.

Amundi has not backed any European SPACs and has not been "seduced by the value proposition" of new SPACs in the IPO pipeline here so far, Mortier said.

Misalignment of interests

In general, Amundi finds the current SPAC structure mostly beneficial for sponsors, investment banks and investors with a short-term horizon. The underperformance of SPAC stocks after they merge with a target company compared to pre-merger prices is hurting long-term investors, the company said.

There was, and still is, a misalignment of interests among SPAC stakeholders as the pains and gains are not shared equally, with investors facing a higher level of risks, according to Mortier. The recent "brutal" price drop in U.S. SPAC shares has cost investors who bet on the product three months ago 30% of their investment, while sponsors remain untouched and banks continue to make a profit, Mortier said.

The IPOX SPAC Index, tracking the aftermarket performance of U.S. SPACs, dropped to less than 720 points on May 18, from its mid-March peak of close to 940 points.

Even with new SPAC issuance drying up, investment banks still stand to gain between $8 billion and $10 billion in SPAC-related fee revenues over the next two years by assisting already-listed SPACs in finding targets, Eric Li, research director at Coalition Greenwich, said in an interview.

Sponsors also get their money's worth as they typically receive a 20% stake in the SPAC for a nominal investment. There have been sponsors who have launched multiple SPACs and therefore multiplied their opportunities to get returns, Mortier said.

Selectivity is key

For investors, there is more uncertainty about the returns they will get as the slew of listed SPACs look for suitable targets in the next few years. All the money raised by blank-check companies is in competition with the dry powder private equity firms are looking to invest, as well as with corporate capital set aside for M&A, Mortier said. In some sectors, there is so much money "sitting on the sidelines" that deals will inevitably become too expensive, he added.

The situation in the U.S. technology sector is particularly tense and reminiscent of the 2000 dot-com bubble, with soaring corporate valuations and too much capital to be deployed.

As sponsors are under pressure to make an acquisition within the standard SPAC time frame of two years, they will be more willing to buy at any price. Therefore, for SPAC investors the making of a good deal becomes less obvious, he said.

"Selectivity is key," Mortier said, adding that before putting money toward anything, investors must make sure the terms of the deal are "fair and reasonable" and they understand all aspects of the SPAC as "there is a lot of small print." Sponsors must be dedicated to the select sector and not just chase returns. If a sponsor juggles multiple SPACs at a time, this is not a good sign, he warned.

GAM's Hawtin urged patience and said it is "critical to wait until the merger candidate has been identified and made public, maybe even waiting for the deal to be consummated, at which time an investor is buying a tangible business proposition that can be valued by traditional metrics."