What the Retreat From SPACs Means for Education Companies and Investors

Contributing Writer
Why SPACs are in retreat, EdWeek Market Brief

A venture led by prominent ed-tech investor Michael Moe that raised roughly $260 million to buy an education company and take it public is throwing in the towel.

Moe’s special purpose acquisition company — Class Acceleration Corp.announced this week that its board of directors has decided to dissolve and liquidate before the end of the year.  

The move is the latest example of a SPAC announcing plans to fold and return cash to shareholders — a trend with ramifications for investors betting on the next big education play, and K-12 companies eyeing a quicker route to public markets. 

The conditions for SPACs have been undermined recently by market volatility, higher interest rates, and newly proposed regulatory measures.

SPACs are shell companies that raise money through an initial public offering with the purpose of acquiring another company and then taking that business public through a reverse merger.

They generally have two years to complete an acquisition, and are called blank-check companies because investors buying into the IPO do not know what the eventual acquisition target will be. 

The financial vehicle became one the hottest pandemic-era trends in investing — raising mountains of cash in 2020 and 2021 — and has emerged as a viable alternative to traditional IPOs for companies in the education sector looking to go public.  

Since 2020, SPACs have taken three ed-tech firms public on U.S. exchanges: Skillsoft, Nerdy, and China’s Meten International. Another education company, virtual reality and augmented reality learning provider zSpace, entered into a merger agreement with a SPAC earlier this year, and is in the process of closing the deal, according to a securities filings. 

But it’s crunch time for a lot of SPACs. 

Most blank-check companies listed between 2020 and 2021 are reaching their deadlines to find a deal. Many are now asking investors for extensions, or opting to wind down and return the cash they raised. 

Earlier this week, OCA Acquisition Corp. — an education-focused SPAC facing an upcoming deadline — said it will hold an investor meeting in the coming weeks to vote on whether to extend its timeline for a deal, according to a filing. The SPAC raised $150 million through an IPO in January 2021, but has said in filings it may not be able to complete an acquisition before its termination date, which is currently Jan. 20. 2023. 

Those SPAC deadlines are approaching during a turbulent period for Wall Street in which companies have largely shied away from going public throughout 2022. 

A Rush of Liquidations

Moe’s Class Acceleration Corp., one of the more buzzed-about education-focused SPACs, was aiming to acquire a large education company positioned as a “digital learning leader that benefits from the dual tailwinds of the knowledge economy and the internet,” according to a securities filing

The blank-check company raised $259 million during a January 2021 IPO. With its liquidation, however, that money will now be returned to shareholders. 

Moe, the CEO of Silicon Valley-based GSV Holdings, an investment firm that backs dozens of ed-tech companies, did not return a request for comment, and the SPAC’s announcement did not specify why it decided to liquidate. 

Facing a Jan. 20, 2023 deadline to find a deal, Moe wrote to shareholders last week saying “immediate and actionable opportunities” are in progress, but more time is needed. Investors at a Tuesday meeting approved a six-month extension, but the board opted to shut down instead. The SPAC will stop trading its stock on the NYSE next week (Dec. 29). 

There are deals out there. But whether everyone will be successful in finding one, I can’t say.Jeff Silber, BMO Capital Markets

Class Acceleration Corp. is far from alone in failing to find a deal and deciding to close up shop.

At least 94 SPAC deals, worth an estimated $33.7 billion, have been liquidated in 2022 as of Dec. 19, according to SPAC Research, which tracks the industry. 

Analysts say a number of headwinds are leading to mass SPAC liquidations, including market volatility, higher interest rates, new proposed regulatory measures, and a 1 percent excise tax that blank check companies could face if they return cash to investors starting in 2023. 

Jeff Silber, a stock analyst at BMO Capital Markets, said that SPACs in general are not as enticing an option as they were in the previous two years. But the investment vehicle remains viable, he said, in part because there are plenty of smaller companies that don’t have many other options to attract capital. 

Despite the crush of SPACs liquidating and returning money to shareholders this year, more than 400 blank-check companies are still looking for acquisition partners, according to data from SPAC Research. 

“There are deals out there,” said Silber, who follows the ed-tech sector. “But whether everyone will be successful in finding one, I can’t say.” 

A New SPAC Venture

Only one new SPAC has filed with the U.S. Securities and Exchange Commission this year, saying it is focused on buying an education company and taking it public. 

That SPAC — Noble Education Acquisition Corp. — is planning to raise $100 million through an IPO, and wants to acquire “a leader in the educational technology spectrum, with a central position in today’s market based upon three characteristics: reach, content and/or assessment,” according to a securities filing. 

At least 94 SPAC deals, worth an estimated $33.7 billion, have liquidated this year, by one estimate.

Additionally, the SPAC says in its filing that it will be looking for “acquisition targets that identify significant value currently captured in silos created by pre-pandemic market dynamics, traditional educational methodologies and dated means of assessment.”

Noble Education Acquisition Corp. has not yet raised money through an IPO, and its managers say market conditions will dictate when that happens. 

“We are in a holding pattern,” Peter Barkman, the SPAC’s president, said in an interview, “trying to read the signals of the market.” 

U.S. IPOs slowed to nearly a crawl in 2022, down about 78 percent from year-ago levels. 

In 2022, there will be 90 IPOs worth about $8 billion, down from a record 416 IPOs in 2021 with a value of $155 billion, according to a new report from global consulting firm EY sizing up 2022 IPO activity. 

Education IPOs are also down substantially from 2021. 

Last year, bolstered by an interest in ed tech that emerged during the pandemic, an apparent record number of education companies — eight total — went public on U.S. exchanges, either through traditional IPOs or via SPACs, according to BMO Capital Markets. Only one ed-tech firm has gone public in the U.S. in 2022, and it was China-based ed-tech firm Golden Sun Education Group, a foreign language tutoring provider for K-12 students and adults.

But Barkman added that while there were substantially fewer companies overall jumping into the public market, most IPOs this year have been the product of SPACs. According to the EY report, 83 of 90 U.S. IPOs involved SPACs during 2022.

“As a tool itself, the SPAC still seems to be very viable and interesting to the market, even in these conditions,” said Barkman, the executive vice president of international expansion and the chief marketing officer at Finnish software company Solita

The SPAC market was scorching hot in 2021: Blank-check company IPOs raised $162 billion last year, almost twice as much of what was raised in 2020, which, itself, had set a new record. That bubble has since burst, and SPAC IPOs in 2022 will just $13.5 billion total, according to the EY report.

Silber, the stock analyst at BMO Capital Markets, said the decades-old investment vehicle became popular again in the last two years for several reasons: A glut of money in the public markets that investors needed to park; low interest rates; and a quick avenue for companies to access capital.

“It was like the perfect storm,” he said.

Spanning Different Sectors

At least seven SPACs have raised a total of more than $1.4 billion through IPOs since 2020 with their originally declared intent of buying an education company to take public. 

The results so far have been mixed: Some landed deals, one so far has liquidated, the future of several is up in the air, and others opted to invest in companies outside of the ed-tech sector. 

It’s possible for a SPAC to acquire a company in an industry that wasn’t an initial or primary target if a good deal presents itself. 

We are in a holding pattern, trying to read the signals of the market.Peter Barkman, President of the SPAC Noble Education Acquisition Corp.

Take Adit EdTech Acquisition Corp, which raised $276 million in a January 2021 IPO.  The SPAC, according to a regulatory filing, was targeting “businesses in the education, training and education technology” industries. But the SPAC ended up merging with bitcoin miner Griid Infrastructure in a deal valued at $3.3 billion. 

Likewise, Edify Acquisition Corp., a SPAC that also raised $276 million in a January 2021 IPO, and was looking to acquire an education company, announced this week with a deadline looming that it had found a deal — but not with an ed-tech firm. Instead, the SPAC is merging with Unique Logistics International, a global logistics and freight forwarding company. 

One education-focused SPAC backed by two managers with bonafides in the sector — a former Obama-era appointee to the U.S. Department of Education and a former president of McGraw-Hill Education — had its registration statement for a $175 million IPO declared abandoned in October because it had been on file for nine months without becoming effective. 

And an education-focused SPAC founded by former Blackboard CEO Jay Bhatt — Agile Growth Corp., which raised $300 million in a March 2021 IPO — still has a few months to find a deal before its deadline arrives in March 2023. 

Rough Conditions Ahead

More SPAC liquidations are expected in the near future.

The vast majority of more than 400 SPACs still looking for deals are facing deadlines in the next six months, according to EY. Factors ranging from increased regulatory scrutiny to dismal post-merger SPAC stock price performances have “dampened investors’ appetite and momentum during most of 2022,” the EY report says.

Moving forward, the SPAC IPO market is expected to “return to its more normalized pre-2021 level,” according to the EY report.

“SPACs will continue to have their place in the equity capital market landscape,” the report says, “but until then they will need to continue to navigate choppy market conditions.” 

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