Market Pulse | The end of Europe’s biggest SPAC, a bottom for global VC investing(?), and US corporate earnings under pressure

Sidekick Money · Market Pulse: The end of Europe’s biggest SPAC, a bottom for global VC investing(?), and more...

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Welcome to this week’s Market Pulse, your 5 minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.

In this week’s edition we have:‍‍

US corporate earnings under pressure
The end of Europe's biggest SPAC
A bottom for global VC investing in 2023?

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It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

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1) US corporate earnings under pressure

High inflation and weak demand is putting pressure on corporate profitability. According to Factset, a financial data provider, analysts are rapidly revising down their expectations. US corporate earnings are now expected to fall by the most since the covid pandemic. Analysts estimate that upcoming quarterly earnings will fall by almost 7% compared to a year ago[1].

We are seeing more warning signs of an increasing likelihood of deteriorating corporate earnings. In the first quarter of 2023, demand for personal computers fell 29% compared to the same period last year. Demand has now fallen below the units shipped in the first quarter of 2019, before the pandemic and hybrid working boosted demand for PCs. Apple, the most valuable company in the world, saw demand for its Mac’s fall more than 40% compared to last year. This is the worst decline in Apple Mac demand since the dotcom bust back in 2000.[2]

The weakness in demand for tech hardware has led to an inventory buildup across the tech supply chain and, as a result, semiconductor and related tech companies issued multiple profit warnings over the last quarter. [3]

It’s not just in the US where the economic and corporate earnings outlook is bleak. The International Monetary Fund (IMF) has warned that thanks to higher interest rates and tensions between the US and China, their outlook for global growth over the next 5 years is the weakest it has been for more than 3 decades. [4]

Thanks to gathering storm clouds, speculators, mainly hedge funds, are now the most negative on US equities they have been since November 2011.[5] This consensus negative view on US equities means even a slight positive surprise could cause hedge funds to quickly unwind their negative bets on US stocks. When everyone is positioned for a bear market, unexpected good news can cause higher market volatility. We could be in for a dose of market volatility over the next few months.

2) The end of Europe's biggest SPAC

A SPAC, or special purpose acquisition vehicle, is a blank cheque company that raises funds from investors by listing on the stock market with the view to buy and then merge with a private company.

A SPAC boom started in 2020 and by 2021 more than 200 SPAC IPOs raised $160bn according to the London Stock Exchange. The top 5 investment banks that facilitated SPAC IPOs raked in almost $2bn in deal fees. [6]

But as inflation accelerated and central banks started raising interest rates, investor risk appetite fell sharply. The SPAC boom quickly went into reverse. By mid 2022, there were more than 600 listed SPACs that had not been able to find a private company to merge with. This leaves SPAC sponsors in a difficult situation. Sponsors typically put up 2%-3% of a SPAC’s total capital and lose that money if the SPAC fails to find a target within two years. [7]

Last week it was announced that Europe’s biggest SPAC, Pegasus Europe, backed by LVMH founder Bernard Arnault, would be wound up after failing to find a target. Pegasus Europe was trying to merge with a company focussed on disrupting financial services in Europe. They raised more than $500mn in 2021 and looked at dozens of companies in the fintech, wealth management and payments space but failed to strike a deal at an attractive price. [8]

Given the material decline in the value of many private companies over the last year it is understandable that companies are reluctant to sell to SPACs at depressed valuations. If start-ups run out of cash due to an increasing difficulty to raise money, they might not have much of a choice.

3) A bottom for global VC investing in 2023?

Venture capital funding for startups is having a rough start to the year. Globally, venture funds invested $76bn into startups in the first quarter of 2023, down more than 50% compared to a year ago. This includes the $10bn Microsoft invested in OpenAI in January. [9]

But this sounds a lot worse than it is. 2021 and 2022 were exceptional years for venture capital funding. In 2021, global venture capitalists invested $681bn into startups and then another $445bn in 2022. To put this into perspective, the yearly average between 2018-2020 was $310bn.[10]

There are tentative signs that venture capital funding is stabilising. In the third quarter of 2022, global VC funding totalled $82bn. It fell by 6% quarter on quarter to $77bn in the fourth quarter of 2022. And, in the first quarter of 2023 it only fell 1% to $76bn. The pace of decline is clearly slowing down. If we assume $76bn is the quarterly average for 2023, then total VC funding in 2023 will be close to the $310bn 3-year average before the 2 boom years in 2021 and 2022.

If VC funding stabilises from here on, total VC funding in 2023 will be down 32% compared to 2022. But remember, 2022 was still a really good year for VC funding compared to pre-covid averages. Things could start improving from 2024 onwards. According to Crunchbase, venture capital investors have a record $580bn in cash available for deployment.[11] There is plenty of capital available to companies that are truly innovating and bringing exciting new products to market. Watch this space!