“I think we're going to see some of those going back private, [being] bought, or taken over by either some larger competitor or by someone who believes in tech, the solution they are designing or providing,” he said.
“It is an opportunity to take a business that has potential, and they can get it at a currently undervalued price.”
Imrie, Beazley’s focus group leader for the London D&O market, was speaking on a panel titled “The SPAC and de-SPAC Evolution: Where Are They Headed?” during this week’s PLUS D&O symposium.
“Just from the underwriting side, we have always had concerns,” he said. “We have seen some SPACs move remarkably quick, almost too quick.”
The executive went on to say that as some SPACs find themselves towards the end of their search periods, “there is desperation that comes in, and some of the targets are going to be outside of their area of expertise, outside of what they naturally would be going after”.
Sam Rudman, a founding member of Robbins Geller Rudman & Dowd and member of the firm’s SPAC task force, said there is always a “very thick financial motive” behind a SPAC, and, in a situation where you are “running out of time”, that usually leads to “bad decision-making and is a very fertile ground for litigation”.
According to data from SPACInsider, there were a total of 613 SPAC IPO transactions in 2021, which generated $162.5bn in gross proceeds. That is a massive leap from the 248 transactions that took place in 2020, which raised $83.3bn – and way ahead of the prior decade’s activity.
Sources have told this publication that while rates in 2022 are expected to stabilize due to the influx of new capacity last year, conditions for SPAC D&O insurance products are expected to remain turbulent amid uncertainty concerning claims resolution and heightened SEC scrutiny.
Panelists also agreed that inventory for SPACs remains high, with Imrie anticipating that more and more SPAC entities could end up having to liquidate before finding a target. "I think that's quite a prudent approach,” he said.
Referring to a SPAC he was involved in that recently liquidated, Imrie added: “The view was they didn't want to go out there and fight for some of the deals they were looking at and thought valuations were starting to get to a point where it didn’t make much sense. I think we are going to see more of that.”
Retail craze wanes, litigation concerns
In 2021, SPAC IPOs became a popular target for litigation and regulatory scrutiny. The number of securities class actions filed against SPACs and de-SPACs increased 520% from 2020.
An important dynamic at play, Rudman said, is that SPAC litigation is very “retail investor based”.
“A lot of these companies don’t fit institutional investor guidelines, so a lot of people that control these lawsuits are individuals,” he said, adding that “SPACs are not sought after by institutional investors; it is something that a retail investor can easily get in on.”
While many retail investors jumped at the opportunity to invest in post-deal announcements and pre-close SPACs, most institutional investors were hesitant, panelists agreed.
However, retail investor excitement waned after many of those deals proved to be challenging, pushing redemption rates up, said John Sylvia, co-chair of the securities litigation practice at Mintz Levin.
In a SPAC deal, when a holding company reaches a deal with a target company to take it public, shareholders can choose to support the business combination or sell their shares back, exercising what is known as a redemption right.
“In a lot of these cases, the individuals who invest have an opportunity to redeem if they decide they do not want to participate in the business combination, and you are seeing redemptions that are as high as 90%,” he said.
“So, you have a lot of shorts that are losing money on some of those. It will be interesting to see whether they will participate going forward, and how that will impact the SPAC market.”
SPAC D&O market evolution
As the SPAC D&O market faces turbulence, the increase of SPAC business combinations, along with the scarcity of insurers willing to write coverage for this product, has pushed up D&O premiums for SPAC IPO cover significantly.
Premiums rose by four to five times between the first quarter of 2020 and the first quarter of 2021 and continued to grow moderately through the end of last year, according to a recent report by Woodruff Sawyer.
Considering that, Beazley’s Imrie said the SPAC D&O market has been constantly evolving, adding that his forward-looking perspective shifts “almost daily”.
Imrie said that while the market has slowed down, he is still seeing SPAC submissions constantly “morph”.
“We are not necessarily seeing the repeat sponsors, we are seeing some fresh faces,” he said. “We are seeing different target industries that are maybe quite niche, and we have started to see a lot of crypto, digital assets and NFTs.”
Among other changes, Imrie said he is seeing smaller raises, as well as SPACs targeting different jurisdictions internationally.
On international targets, Imrie added: “There are some good companies out there, and there is some smart, really good tech being generated all over the world.”
However, the executive questioned whether those companies are ready to be “translated” into US publicly traded companies.
“That is something we are having to scratch our heads with, to get our underwriting right,” he added.
In situations like this, Imrie said underwriters are looking carefully at retentions, pricing terms and conditions, to make sure they are adequately protecting themselves.
“We have tried to be dynamic, we have tried to respond to the demands of the insureds, the clients, and the demands of the brokers, while also trying to manage and navigate something that is really uncertain,” he said.
