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The banks most exposed to SPAC revenue decline

What connects Jay-Z, President Trump, Serena Williams, Richard Branson, Bill Gates and most American investment banks? They’ve all dipped their fingers in the big SPAC pie.  

From 2019 to 2021, the SPAC market was the Wild West of financial over-optimism and investors threw “dry powder” (the industry term for spare cash) at any person who seemingly had a pulse and an idea, hence the celebrity pile-on. This March, however, the US Securities and Exchange Commission (SEC) proposed new rules for SPACs which would make it easier for investors to sue the investment banks underwriting the deals. As a result, Goldman Sachs is shrinking its SPAC business, Citi is taking a pause as it works with legal advisers to clarify the risks and Credit Suisse is also reviewing its exposure to SPACs following the proposed regulatory changes.

2021 was a record year for SPAC listings, but how much revenue did banks generate from the activity and how exposed are they to a potential sharp drop in SPAC deals? The chart below shows the fees generated by the top ten banks ranked by SPAC listing alongside the overall fees generated in their Equity Capital Markets (ECM) divisions:    

Source: Dealogic

And here is a table showing what percentage of fees in the banks’ ECM division were generated by SPAC deals: 

Source: Dealogic

The decline in SPAC activity looks more painful for some banks than others. SPAC deals at Citi and Goldman Sachs – the two firms that led the 2021 league table – made up less of their overall ECM revenues than the likes of Cantor Fitzgerald, Deutsche Bank and Credit Suisse, all of which could be susceptible to job cuts. In some cases, people have been leaving already: Cantor lost Nick Struck – the firm’s Head of SPAC and Event Driven Sales & Trading – in April this year alongside three other managing directors who left to pursue other opportunities. Deutsche has had its own SPAC scandal when Brandon Sun (Head of SPAC Advisory) lost his job following an investigation into a strip club visit filed as a business expense. Sun recently landed on his feet at Cohen & Company Capital Markets, a boutique investment bank focused on SPAC clients.

The new rules stand to make SPAC advisory and underwriting services less attractive by exposing banks to increased liability risk from investors claiming that they received incorrect or incomplete information. However, Bloomberg’s Matt Levine gives a novel suggestion for how banks wanting to keep riding the SPAC train can skirt new regulations. He argues that one interpretation of the SEC’s rules is that if a bank does a SPAC’s IPO and the other does the de-SPAC transaction (when the SPAC merges with, and takes public, a private company), neither bank has the liability as underwriter and therefore have limited risk from legal persecution. So, while markets are currently not supportive of SPAC activity, if there is a coming boom he expects to see a “division of labour” between banks as a result of the SEC rules.

That “division of labour,” however, already seems to be playing out in a different way with the head of SPACs leaving Cantor, Brandon Sun leaving Deutsche for a boutique and Credit Suisse’s former CEO Tidjane Thiam plotting his comeback with a $1.5bn SPAC deal after an espionage scandal at the Swiss bank. Talk about the Wild West.

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AUTHORNathan Risser Editor

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