SPAC activity sees sharp decline in Q2: RPT

Renaissance IPO ETF Manager Kathleen Smith joins Yahoo Finance Live to discuss why SPACs are plunging in Q2 and the outlook on IPOs for 2021.

Video Transcript

AKIKO FUJITA: Well, the regulatory scrutiny [INAUDIBLE] the activity of special purpose acquisition companies, or SPACs. SPACs raised more money in the first three months of this year than all of last year. But there's been just 10 new SPACs that came to market in April.

Let's bring in Kathleen Smith, Renaissance IPO ETF Manager. And Kathleen, we're talking about this in the context of the SEC cracking down. Is that really sort of the number-one reason why we have seen such a dramatic slowdown in SPACs? What are you seeing?

KATHLEEN SMITH: Some of it is the regulatory crackdown. But really, the underlying issue is the returns on SPACs. And we had a contraction in returns in the IPO market, and sort of a-- some risk aversion that came out through mid-May. And the prices for these SPACs in the trading markets had declined. So we had a lot trading at premiums, and then they fell to below their IPO prices. And that got investors very nervous.

And also, the returns on the companies that had been de-SPACed, or the SPACs that had made mergers, were inferior to the returns on regular-way IPOs. So we've been seeing-- for example, in May we saw a much lower amount of issuance because of that. And we're still seeing so far about half of SPACs trading below their IPO price. So it's not exactly the most positive sign, although we're seeing a bit of a recovery now. So I wouldn't rule out SPACs at this point.

ZACK GUZMAN: Yeah. And Kathleen, obviously it's a very different story when you look at what's going on in the IPO space-- very busy year relative to last year, at least at this point. I mean, when you break it down, how is the IPO activity comparing to what we've seen specifically and who's leading some of the activity now?

KATHLEEN SMITH: Well, we're at unprecedented levels of IPO activity. And some of it had to do with the fact that last year, the returns were phenomenal. We got into February with really strong returns. They far outpaced any other asset class. Then we had a slowdown and a contraction in returns. But we have seen this pickup over the last several weeks, and issuance is coming back again.

We looked at all of the deals that were done since the middle part of May, and every single one of them has had positive returns. So we're on a very nice trajectory. And I think it's because some of these deals have been priced a little more conservatively and have worked well for investors. So we're seeing a really strong market now coming out of this pullback, and an interest in all kinds of companies-- payment processors. Tonight, dLocal will price, a very fast-growing, highly profitable cross-border payment processor. And a lot of other amazing companies that are on the calendar.

AKIKO FUJITA: So with that said, Kathleen, how much of the strength you're seeing right now do you anticipate will continue going into the second half of the year? And what do you think is the number-one thing that could potentially derail it?

KATHLEEN SMITH: Well, the pullback we had over the last couple of months had almost everything to do with a fear of inflation and rising interest rates. Interest rates have been pretty-- not a concern, right? Investors got concerned. We saw rates pull back a little bit. So I think even though inflation is out there, we haven't seen it manifest itself yet in treasuries. But it is still out there.

And that's probably the biggest bugaboo, because IPOs are growth companies. And when growth companies-- the value of companies that are growing is diminished when the discount rate rises, which is effectively interest rates going up. So there is that worry. But they've been kind of benign over the last several weeks. I think investors are getting a bit comfortable with, maybe we're in a Goldilocks environment where we can have this opening and, we're not going to see it come out in interest rates. We'll see. We're in a good point now.

But I would say, if you're asking about where we see the end of the year, I think it's going to be a little more moderate than how we started out the year, just because I think investors are just a bit more cautious-- which I always like, because I think the market works much better when there's a little bit of fear in there and investors are concerned about valuation. That's always positive for returns.

ZACK GUZMAN: Yeah, and it's probably a little bit helpful when we think about where the downside could be for some of these. I mean, we haven't seen a lot of overexuberance relative to what we saw last year when it came to companies doubling in their first day of trading after an IPO. And so maybe that's healthy in the way that we've seen it shape up.

But to your point on SPACs and pricing power there, I wonder if that might come back, if some of the exuberance might come back if this back kind of boom took away from some of the excitement around the names that were going public via IPOs. I mean, might that maybe bring back some of the big insane day one rallies we've seen?

KATHLEEN SMITH: Well, we think SPACs are a vehicle that is being used by companies that really can't go public. And so it's a path to liquidity when it would be hard for them to pass through the scrutiny of a regular-way IPO. So I don't think SPACs really take away. SPACs are a very good thing for the private market that has been chock full of funded companies that need liquidity.

We look at pops-- and currently, the IPO pop is higher than normal. The average has been, like, 13%. And we're saying 30%-plus first day pops. They're high. So I wouldn't consider this to be an inexpensive market. And valuations are high.

Now, with interest rates as low as they are-- and if they stay this low, maybe the market can sustain these higher valuations. And I will say that there's some really strong-- this is not the internet bubble in terms of the types of companies. It kind of looks like it when it comes to valuations, so we are a bit concerned about that. But the quality of the companies that are coming to market through the regular IPO process are really good.

So we just have to figure out valuations. But I think if you look under the covers at the growth revenue margins, their cash flow, they're on a very positive path that I think says a lot about the current IPO market and why investors keep looking here, because that's where we're going to see some major companies.

I mean, we're going to see-- even Krispy Kreme has come back to try to go public. Robinhood. There's a huge list. And many of them are attractive financially.

AKIKO FUJITA: Well, it's certainly good to get your overview there, Kathleen. Kathleen Smith, Renaissance IPO ETF Manager.