Bloomberg Línea — Sponsors of Latin American special-purpose acquisition companies (SPACs), which are known as “blank check” financial vehicles that raise funds for finding and merging with a company to take it to the stock exchange, are racing against time to close deals with their targets as the deadline for those who raised funds with investors in 2021 expires this year.
The sector is going through a crisis as rising interest rates have slowed down business, as has the market for stock offerings and mergers and acquisitions). Moreover, the companies that are the target of SPACs are, in general, technology companies, and which are the most affected by the monetary tightening and the economic slowdown.
In recent days, Brazilian startup Nuvini and a subsidiary of Ambipar announced mergers with SPACs. Both are on the cusp of surpassing the timeframe for the transaction and are seeking extensions of contributions.
The blank-check vehicles, once listed on the stock exchange, need to find another company to merge with within two years.
If they cannot meet the 24-month deadline, either the investors contribute more resources in an extension, or the money has to be returned to them.
Among the Latin American vehicles that are still looking for a company to carry out a merger are Valor Latitude, the SPAC vehicle of Valor Capital Group, which listed in May 2021; XPAC, the SPAC that has XP as manager, which held an IPO in July 2021, and MEKA (MEKA), the SPAC of MercadoLibre and venture capital firm Kaszek, which held an IPO in October 2021.
Generally, to request an extension, a SPAC must hold an asset in trading, and in the process of closing the deal. In some cases, managers have to pay for that term extension.
SPACs listed on US exchanges hold about $18 billion in investor cash, according to data compiled by Bloomberg News. There are more than 70 SPACs with a near-term liquidation deadline.
Despite the downturn in this market since 2022, SPACs are still active and include companies from Brazil: this was the case of Mercato Partners, from Utah, which raised a SPAC of $200 million in November 2021 and, in February 2023, merged with Brazilian Nuvini, a startup founded by Pierre Schurmann.
Another case was Ambipar Response, which began trading on the New York Stock Exchange earlier this month after merging with HPX Corp, Carlos Augusto Piani’s SPAC, which raised $220 million in July 2020. With extensions, the deal had been negotiated since mid-2022.
Boardroom Alpha data shows that more than 30 SPAC managers had their vehicles dissolved this year, while 86 were able to extend the term. SVF Investment Corp, one of SoftBank’s three SPAC vehicles, was a case of a SPAC delisting from Nasdaq, after it failed to find another company interested in merging after raising $604 million in a 2021 IPO.
Term extension only in certain cases
“Ultimately, the SPAC managers who foot the bill to have that capital allocated with them - because there are costs associated with raising a SPAC - are going to bear this unilaterally if they have to return the money to investors,” explained a person with knowledge of the SPACs sector, who preferred not to be identified because the discussions are private.
This means, therefore, that these managers would potentially have to incur more costs to get the extension, and that they will only do so if they are convinced that there is a deal on the table that is worth it.
“We have not seen most managers actively considering the extension. We have only seen those who are really already on the cusp with assets under negotiation,” the source said.
But in a scenario where the stock market has fallen 20% in the last one-and-a-half years for companies in the S&P 500 and Nasdaq, the investor who invested $100 in a SPAC would not exactly come out at a loss if the vehicle dissolved, as they would get the $100 back with a Treasury yield.
“Theoretically, investing in a SPAC was the best thing that this investor could have done,” the source explained.
This is not the case for the manager who was able to raise funds with investors through SPACs and who will have to return the capital.
The now tight deadline is not the only issue that has increased market pessimism about SPACs. There is also increased scrutiny from the US Securities and Exchange Commission (SEC), which has not yet decided how it will handle the issue of legal risk from advisors of SPACs.
The question is whether regulation will be more like the coordination of an equity offering or whether it will be like a mergers and acquisitions advisory. This has important implications for the large banks that used to operate in this market and have now sidelined these vehicles.
The lack of target companies in good conditions for the acquisition and the cases of companies that even went public through SPACs but went bankrupt or were sold at liquidation prices have also increased the noise and volatility in this market.
SPACs in Brazil and the Nuvini case
Last year, Brazil had its first case of a technology company using a SPAC to go public, when Semantix merged with Alpha Capital.
Nuvini, which merged with a SPAC earlier this year, is a serial acquirer: it acquires smaller companies to grow and uses the cash flow generated by the acquisition to buy even more companies. By repeating the process, it promises to add shareholder value.
In an interview with Bloomberg Línea, Nuvini’s founder Schurmann said that the company proposes to “tropicalize this model”, using the strategy of acquiring Brazilian companies that bootstrap or that have gone through Angel and Seed funding but have not taken the valuation path with venture capital.
“There are good companies, with good teams and with founders that, after eight, 10 years, seek to realize part of their earnings, of the result of their work,” said Schurmann. He added that accessing the stock market made sense “because we are in this continuous acquisition process”.
“We are unlocking value for the founders and the investors of the companies that we acquire, but we also understand that giving more liquidity, or an alternative liquidity path, to these investors would make Nuvini more attractive and more interesting,” he said.
For Schurmann, SPACs appeared as this “alternative path” of access to the stock market at a time when there was a significant reduction in the money allocated to technology in Brazil.
According to the innovation platform Distrito, in 2021, $5.8 billion was invested in Brazilian late-stage startups, equivalent to 63% of the total invested that year. In 2022, that figure fell to $1.5 billion, or 45% of the year’s accumulated amount.
Since its founding, Nuvini has completed two rounds of investment with family offices and raised a debenture on Brazil’s B3 exchange. “We wanted to do a Series B, we were looking to do a round and talking to some investors, but we understand that the moment creates a greater degree of difficulty given the significant shrinkage in capital allocated to growth in Latin America,” said Schurmann, who was looking for financing with private equity funds.
It was in this context that he contacted Mercato, initially seeking an investment round. Mercato is a fund with $2.1 billion under management.
“The conversation evolved given that they already had a SPAC,” he said. “We saw a lot of complementarities because Nuvini is acquiring companies outside the big cities. That started by accident, but now we are prioritizing it. We find companies with good numbers and a lot of cash discipline, and so does Mercato. It invests in companies outside Silicon Valley,” said Schurmann.
Nuvini’s debenture, which was a debt issue to acquire companies in 2020, “is well accommodated within the cash flow”, according to the entrepreneur. He said he has no intention of making new debt issuances.
“We intend to use both the listed share currency and Nuvini’s own cash flow,” he said, and that the company intends to acquire four to six companies a year.
“The Nuvini deal is a thesis that needs capital and is calculated on top of the prospect of buying other SaaS (Software as a Service) companies, to put them under a holding company umbrella. To buy other companies, you need capital. it’s a thesis that doesn’t stand without money. Looking at the private and public market conditions, SPACs seemed like the only plausible alternative. It was smart for Nuvini to be able to raise some capital,” said the source familiar with the SPAC market who spoke to Bloomberg Línea on condition of anonymity.
