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MARKET COMMENTARY

As Uncertainty Mounts, Deal Activity Lessens

A convergence of unknowns continues to impact deal activity, with no clear end yet in sight. Geopolitical tensions, recession fears and monetary-policy concerns have pushed traditional IPO activity to its lowest levels in nearly 20 years. The SPAC M&A market, already subdued in the face of a stream of SEC rulings, declined slightly from the previous quarter in activity levels, but still shows a rise in withdrawals, cancellations and redemption rates. As the Federal Reserve raises interest rates to battle inflation, seasoned market professionals are watching closely for signs of a US economic contraction.

Source: KPMG, see below

REGULATORY DRIVERS

  • Continued amendments to proposed SEC 140a rules regarding SPAC projections, disclosures and underwriters.
  • Proposed rules have elicited comments and requests for 140a scope clarifications.
  • Stakeholder groups have expressed concern that the new rules could discourage SPAC activity.
Source: KPMG, see below
You have to align financial reporting with your equity story. That’s how you cut through market noise. The insights are in the accounting, if you know where to look.
Isaac Freites, Director, Accounting Advisory Services


Signals intelligence:

Reading the capital markets for IPO and SPAC timing

While every company’s mix of deal-valuation drivers is unique, some market indicators are broadly relevant. Below, a selection of market indicators, updated quarterly.

    

Signals intelligence:

Reading the capital markets for IPO and SPAC timing

While every company’s mix of deal-valuation drivers is unique, some market indicators are broadly relevant. Below, a selection of market indicators, updated quarterly.

Source (for all chart content and commentary): KPMG, see below

   

     

MARKET VOLATILITY AND TRADITIONAL IPOS

Historically, deal activity – both volume and proceeds – tends to correlate inversely with volatility (VIX)


Volume vs Volitality

Monthly IPO Volume (Traditional & SPACs) vs. average quarterly VIX

After reaching an all-time high in 2021, traditional IP0 volume witnessed a steep fall in YTD 2022. Q3’22 saw just 34 IPOs recorded, a 67.6% decrease from 3Q’21.

IPO activity remained largely flat from Q2’22 to Q3’22, in both numbers and gross proceeds, because of uncertainty induced by geopolitical tensions, the specter of US recession, and continued interest rate hikes.

   

    

ACTIVITY BY SECTOR

SPAC activity, by volume, proceeds and sector

SPAC M&A remains slow, due to rising inflation, macroeconomic uncertainty, and adverse political developments.


US SPAC M&A Activity

            

SPAC M&A volume and value (US$ bn) (2017-Q3'22)

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  •  Q3'22 saw a slight decrease in the SPACs M&As as compared to Q2'22, however, considering highs of Q1'21 (83 M&As), the quarter registered only 44 deals despite abundant presence of target-seeking SPACs.
  • The slowdown in M&A volume is due to poor performance of De-SPAC companies, rising inflation, macroeconomic uncertainty and adverse political environment

SPAC M&A volume by sector (2017-Q3’22)

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  • TMT still remains the most dominant sector in which SPACs have underwent an M&A. ~28% of the total deals (during 2017-Q3'22) happened in TMT sector, out of which 76% belonged to the technology sector alone.
  • IM also accounted for 25% of total deals in the period, with diversified industrials sub sector being the most sought after sector.

     

DRY POWDER AVAILABILITY

Headline

SEC continues to bring amendments to the rules specifically regarding projections, disclosures and underwriters, resulting in curbing the growth of SPAC IPOs and M&A


SEC Rules and Guidelines for SPACs


SEC proposed new rules regarding investor protections and disclosure requirements with respect to, compensation paid to sponsors, conflicts of interest, dilution, and the fairness of business combination transaction due to the abysmal performance of De-SPAC companies.

 

   

   


 

   



Proposed safe harbor for SPACs under the conditions that the SPAC's assets consist solely of certain types of securities and engage in only 1 De-SPAC transaction which it should complete with 24 months

 

   


 





Increased transparency in financial projections by eliminating the safe harbor provisions.


 

   

    
 

   


 



Alignment of De-SPAC transactions with traditional IPOs by requiring target companies as 'co-registrant' and requiring underwriters involved in SPAC IPOs to also underwrite respective De-SPAC transactions
 
 

   


 


Rule 140a treats the SPAC IPO and De-SPAC transaction as one continous distribution of securities which further would mean that anyone who has acted as an underwriter of a SPAC and directly/indirectly participates in a de-SPAC transaction to also be deemed as an underwriter in the de-SPAC transaction    

   


 




Enhancing disclosure requirements to include potential conflict of interest, dilution of shareholder, interest, compensation earned by sponsors etc.

 

    


Key comments from participants on SEC's new rules

    
 

Headwinds

Implied Probability of U.S. Recession

10y1y U.S. Treasury Spread

  • Rising interest rates - Higher interest rates will dampen housing demand and create new costs for borrowers. The Fed is expected to raise rates at just about every meeting (8x) this year.
  • Consumer price inflation in June 2022 9.1% - Inflation is eroding .consumer purchasing power and accelerating a tightening of monetary policy.
  • The contraction in first quarter GDP hid growth in consumer spending.
  • Risks of a recession over the last twelve months are rising, but not yet a level that indicates a recession is imminent.

         

Real GDP and Consumption Report

Quarterly growth, SAAR

Federal Reserve Rate Path

Percentage Point Change from First Rate Hike


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Investors look at a handful of valuation drivers. Do you know yours? 

In the competition for investors and capital, investment narratives matter. They cut through the deluge of data and analysis, and help companies sift real windows of opportunity from market noise. The most compelling deal stories come from insights about a company’s unique mix valuation drivers. Sector. Markets. Customers. Portfolio mix. Capital structure.

      

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Shari Mager

Shari Mager

Partner, U.S. National Leader, Capital Markets Readiness, KPMG US

+1 408-367-7661
Isaac Freites

Isaac Freites

Director, Accounting Advisory Services, KPMG US

+1 212-954-6315
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Source (for all market commentary and data cited on this page): KPMG, US Equity Capital Market Update, Q3’22, October 2022   
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