Dive Brief:

• Deal-makers in June navigated stricter Securities and Exchange Commission (SEC) oversight and completed 27 special purpose acquisition company (SPAC) mergers in the U.S., a monthly record in executed deals and the start of a recovery that will likely gain strength during the remainder of 2021, EY said in a report.

• “While SPAC formation frenzy has slowed from record levels, the lull caused by the SEC guidance is behind us and deals are being announced daily,” EY said, adding “SPAC activity is expected to remain steady over the next couple of months, picking up speed in Q3 2021 and toward the end of the year.”

• At the end of June, 150 SPACs are reported to have found targets and other SPACs “are rushing to identify targets,” EY said. “High quality target companies could have stronger bargaining power,” EY said, adding “with more scrutiny from the SEC, along with improved aftermarket performance, we can expect more quality SPAC deals being announced and executed, which is good news for investors.”

Dive Insight:

SPAC IPO transactions hit a record during last year and the first quarter of 2021 but slumped during the second quarter to just 59 transactions, valued at $12 billion, in response to stepped-up SEC scrutiny.

The SEC issued guidance in April cautioning companies about the accounting treatment of SPAC warrants and the liability risk of forward-looking disclosures. SEC staff said in an April 12 statement that SPAC warrants, depending on their terms, should be treated as liabilities rather than as equity investments.

“As a result, many SPACs had to restate their financial statements, a process that should have been completed by June,” EY said.

Global SPAC IPOs during the first half of 2021 exceeded the record level set for all of last year, with 634 transactions completed, EY said. Among those, 182 SPACs announced acquisitions by the end of June valued at a total of $470 billion.

As of June 30, 452 SPACs with about $136.5 billion in funds were looking for investment targets, EY said.

“Deal pressure is quickly building as more SPACs are now in the market looking for the limited number of high-quality companies and, as a result, standard transaction terms and valuations have become more competitive and negotiable,” EY said.

Worldwide, IPOs of all types hit the highest level in 20 years during the first half of 2021, with 1,070 transactions valued at $222 billion, EY said.

“Equity markets, buoyant from positive corporate results and growth forecasts on gradual economic recovery, and market liquidity have hit new heights and provided favorable conditions for the IPO markets,” EY said.

Technology companies generated 41% of IPO proceeds worldwide during the first half and 27% of total transactions, EY said. Health care and industrial companies were also active, accounting for 15% and 11% of IPO proceeds, respectively.

“The IPO surge in 1H 2021 highlights how lockdown winners are capitalizing on increased demand from investors and a recovery in valuations across global markets, especially in Europe, as well as optimism from the vaccination programs,” EY said. “Moreover, we saw a higher number of materials IPOs due to rising commodity prices.”

But companies weighing whether to go public need to monitor several potential headwinds related to geopolitics, pandemic, valuations and governance challenges, Paul Go, EY global IPO leader, said in a statement.