Bloomberg Triple Take: Kyle Cerminara on SPACs in 2022 and Beyond
Kyle Cerminara is the CEO of Fundamental Global, a private partnership focused on long-term strategic holdings, and Chairman of FG Financial Group, a Fundamental Global holding that is a SPAC and reinsurance platform that has launched 4 SPACs, two of which have successfully closed on profitable targets, and two of which went public earlier this year.
On Monday, I went on Bloomberg Triple Take (see 13:20) to talk about SPACs and where they’re headed from here. Without spoiling it, I’ll tell you that I think the SPAC-lash that’s occurred in recent months — with bulge bracket banks walking away from “most” SPAC issuance — is actually quite healthy and reasonable.
For the uninitiated, after a SPAC craze of sorts spanning from June 2020 to November 2021 — a period that saw more than 700 SPACs go public — issuance has dried up in 2022. It’s been caused by a mix of gross oversupply (there simply aren’t that many private companies to merge with that are ready for prime time), softer demand (public markets are down), and shifting behaviors because of likely regulation from the SEC.
To an extent, this was healthy. SPACs have historically been an alternative path to going public for established small- and mid-cap companies worth $100 million to $1 billion — a niche for which few dispute the utility of a merging with a SPAC.
What happened during the past two years, however, was sad for any SPAC purist. With the stock market awash with money and new market participants (retail traders) buoying prices, inexperienced sponsors jumped in despite lacking any idea of how to sell a stock, talk to mutual funds, or do a deal.
My guess is that 600 of the aforementioned 700 SPACs that went public probably thought they’d make a quick, easy buck while investors in startups saw opportunities for profitable exits far ahead of schedule.
I have covered banks for more than 20 years and I know that when something is hot, bulge brackets build teams to service it, and when it goes cold, they retreat while the core players remain in the market. There are fees to be made at various points of the process with either a SPAC or an IPO, and absent the same liability risk underwriters face in an IPO, banks likely saw little reason to avoid working with SPAC sponsors who couldn’t do the work. What other free lunch has ever been on the menu on Wall Street?
With its proposed new rules surrounding SPACs, the SEC is essentially letting banks know that they should think twice about doing business with people who can’t do the work. It’s a logical approach. Just in case oversupply doesn’t continue to root the wrong sponsors out of the SPAC market, the SEC is choosing to regulate the gatekeepers. Banks have duly taken note, knowing it means they’ll have to be more selective in who they work with. Will they get out of SPACs entirely? No, not at all.
I predict that we’ll see SPACs return to being smaller, where demand for them exists the most. It won’t be for pre-revenue companies that plan to make taxis that drive in outer space in ten years — but it will be for stable $400 million insurance companies, for example, that want to get bigger and more diversified by going public. Over the next year or so, of the 700 SPACs looking for targets right now, 400 to 500 of them will probably liquidate. Looking a couple years into the future, we’ll see no more than 250 SPACs created per year. Anything more would be oversupply.
Frankly, I’m looking forward to SPACs returning to what they once were, and for SPACs to distance themselves from being associated with baseless hype and pre-revenue companies going public. One thing I am thankful for, however, is that I doubt I’ll ever again meet with a target and have to spell out “Special Purpose Acquisition Company” to wide-eyed audiences. The last two years drove awareness, now it’s time to restore credibility.
FG Financial Group is a reinsurance and investment management holding company focused on opportunistic collateralized and loss capped reinsurance, while allocating capital in partnership with Fundamental Global® to SPAC and SPAC sponsor-related businesses. To learn more about FG Financial Group and Kyle Cerminara’s work with it, please visit: fgfinancial.com
