Special Purpose Acquisition Companies (SPACs) are not a new type of financial vehicle, but they have become increasingly popular since the pandemic, particularly on Wall Street. In 2020, the US accounted for 97% of SPACs, globally. But will this growing popularity carry across the pond?
First things first: what is a SPAC?
SPACs are shell or ‘blank cheque’ companies that are set up for the sole purpose of raising money, listing on a stock exchange, and acquiring high-potential private businesses through a reverse takeover. This means that private companies can become publicly-traded without having to undergo a potentially arduous, high-stakes IPO themselves.
SPACs are usually founded by high-profile individuals who have plenty of experience and industry knowledge, and act as the main selling point in the vehicle. For example, American hedge fund owner Bill Ackman raised a record-breaking $4b SPAC in July (Pershing Square Tontine Holdings). These sponsors are often the face of the fundraising initiative and will be some of the key decision makers when it comes to the acquisition.
Criteria for target companies may be pre-agreed, such as big-name startups in a certain sector or geographical region. But depending on where the SPAC is listed, it may or may not need shareholders to approve acquisition targets. For example, SPACs listed on the Standard Segment of the London Stock Exchange do not need shareholders to approve acquisitions. Once the target company has been announced, trading is suspended until the deal prospectus is published and the transaction completed. This means that investors are locked-in even if they disapprove of the deal. Shareholder approval is required for SPACs trading on the AIM and in the US, which can take a few months.
How do SPACs make money?
Early investors have the opportunity to make a lot of money in SPACs, and in a relatively safe way. This is down to the structure of the deal.
Investors into SPACs (often institutional investors such as hedge funds or private equity firms) are issued ‘units’, comprising shares and warrants. The shares are present value units, whereas warrants grant the right to acquire additional shares at a specific point in the future, when the SPAC may have a far greater valuation (similar to employee share schemes).
The warrant price is often around 15% larger than the initial listing price, and may grant the holder a fraction of a share. Once the SPAC has listed, the unit is separated into warrants and shares, so that investors can trade either or both. This means they can sell their present value shares in the SPAC whilst still holding onto the warrants, and exercise them later down the line.
The investment is seen as a safe bet because the proceeds from the listing are usually held in stable instruments, such as US Treasury bonds. Once the SPAC has been listed, it has an allotted time frame to complete an acquisition (24 months on average). If this isn’t met, then the founders must liquidate the shell company and return proceeds to SPAC shareholders (minus expenses).
Of course, as the allotted time frame draws nearer, the SPAC management team will have a weaker negotiation position. On the flip side, pricing will be more favourable for SPACs in a tumultuous or weak market, where private companies may be looking for an exit even at a decreased valuation, especially given that SPAC mergers offer more certainty than an IPO.
So why exit via a SPAC acquisition rather than an IPO?
An initial public offering is not a quick event. It can sometimes take years for a company to complete the process, all whilst under the threat of one bad news story undermining all its efforts (just take a look at WeWork, which had to postpone its IPO following investors’ concerns about the business model and leadership).
Going public via SPAC, on the other hand, can be much faster than the IPO process. The acquired private company isn’t required to go through the extensive, costly regulatory checks necessary for an IPO, because the SPAC already underwent this process when it listed on the stock market. This makes them a speedier and easier option.
Will we be seeing more of them in the UK?
According to new data from Refinitiv, 258 global SPAC have been listed so far this year, already surpassing the record of 256 in 2020. Proceeds totalled more than $76.7b, just $2.5b shy of the full-year 2020 levels. An astonishing 250 of those took place in the United States. None were listed in the UK.
UK SPACs picked up after the 2008 financial crisis, but demand has declined over time, diminished by stories such as Vallar (which was fined almost £5m for breaking listing rules in 2010) and Gloo Networks (which never completed an acquisition). There have been a couple of notable transactions since then, including Landscape Acquisition Holdings and J2 Acquisition (launched by serial SPAC founder, Franklin Martin) which collectively raised $1.75b back in 2017.
But despite all of this upside to SPACs for investors and private companies alike, UK regulations are dampening their appeal. The suspension of trading after the acquisition has been announced is a very real problem for many investors—no one wants to be held hostage by a deal they don’t agree with.
Now is a particularly poignant time to address these concerns, as Brexit marks a sink-or-swim moment in the UK’s position on the global financial stage.
The Hill review, published earlier this month, addresses some of the reasons why private companies may be dissuaded from transitioning to the public markets. The key recommendations include allowing investors to redeem their initial investment prior to the completion of a SPAC merger, and giving them the right to vote on an acquisition prior to their agreement, across all listing segments.
Should Lord Hill’s recommendations come into effect (which looks likely, given the warm reception they received from Chancellor Rishi Sunak), then we may well see a boom in private companies going public via SPACs. And that would be a good thing, in our eyes.
Although there are currently over 1,100 companies listed on London Stock Exchange’s Main Market, with a market cap of around £3 trillion, these tend to represent traditional businesses, and not the innovative companies driving the future of the economy. Indeed, our own data shows that UK high-growth companies have shied away from the IPO scene in recent years. Just 13 Beauhurst-tracked companies IPO’d last year, down from a high of 26 in 2014.
This has coincided with a maturation of the venture capital market, meaning that companies can now raise hundreds of millions, and in some cases billions, of pounds worth of equity finance whilst still operating privately. But this means they miss out on the liquidity of the public markets.
According to Vlad Tropko, Managing Director of VC fund Digital Horizon, we might soon witness a significant shift in this trend: “Over the last decade, companies have been taking an increasingly long time to exit, driven by late-stage US funds deploying significant capital in the European market. But the last two years of public market growth could change that.”
If UK SPAC regulations aren’t addressed, then we may well see promising private companies choosing to migrate jurisdictions. For example, back in November, electric vehicle company Arrival agreed to merge with SPAC CIIG Merger Corp. This will result in the Hammersmith-based unicorn business becoming a public company on New York’s Nasdaq exchange.
And investors aren’t sticking around either. British entrepreneur Michael Tobin is seeking to raise a technology-focussed SPAC called Crystal Peak, which will be listed in Amsterdam.
The media frenzy around US SPACs seems to be spurred on by celebrity endorsements. Take former athletes Shaquille O’Neal and Alex Rodriguez, for example, who are sponsoring Forest Road and Slam Corp., respectively. Bar a handful of Brits, including the likes of the Beckhams, Gary Lineker, Maisie Williams and Andy Murray, the celebrity-turned-business-mogul model is not as popular or high-profile in the UK as in the US, but perhaps that is not such a bad thing.
The Securities and Exchange Commission (SEC) has recently warned investors not to be dazzled by celebrity involvement. In a statement on its website, the SEC warned that: “Celebrities, like anyone else, can be lured into participating in a risky investment or may be better able to sustain the risk of loss. It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment.”
It also noted that “SPAC sponsors generally acquire equity in the SPAC at more favorable terms than investors in the IPO or subsequent investors on the open market. As a result, the sponsors will benefit more than investors from the SPAC’s completion of a business combination and may have an incentive to complete a transaction on terms that may be less favorable to you.”
It’s fair to say that there has been a significant shift in the approach and attitude to taking private companies public in the UK, in more ways than one. Earlier this week, Deliveroo invited all of its customers to participate in its upcoming IPO, which could see the company valued at £7b. This marks a blurring of the lines between a traditional IPO and the customer engagement strategy characteristic of crowdfunding campaigns.
If Lord Hill’s recommendations come into effect, then we may well see an increase in UK SPACs. But we anticipate that the relative success or failure of those in the US will be the true indicator of whether the UK gets ‘SPAC’ in the saddle again.