SPACs (Special Purpose Acquisition Companies) are trending and not only in the North American market where these vehicles have been popular for a number of years. They are now gaining interest from investors globally and particularly in the UK.
Earlier this year and during the initial stages of the pandemic we experienced a resurgence of interest in Jersey cash box structures as a quick means of raising capital for UK listed companies. With private equity and venture capitalist investors looking at acquisition targets and searching for yield within an opportunistic environment, SPACs have become an appealing and increasingly popular alternative to the traditional IPO process. These vehicles also seem to mirror a similar cycle to that of the cash box structures, in that their popularity seems to have increased as a result of market volatility and a demand for cash liquidity caused by the recent pandemic, similar to the period following the financial crisis in 2008.
It’s a newly incorporated company founded by one or more sponsors, with the single objective of making one or more target "acquisitions". The funds are raised through the IPO process and investors will "buy-in" to the track record and experience of its founders/sponsors, often being high profile wealthy entrepreneurs or private equity partners.
The special purpose vehicle will be listed on a chosen exchange and investors and the founders/ sponsors receive shares or warrants (long-term options giving a right but not an obligation) to purchase shares at a set price within a specified period) in the vehicle, with the founders/sponsors typically receiving 10-20%.
The investment strategy for the acquisition published in its listing document would usually be expected to be completed by the founders/ sponsors within approximately 18-24 months (depending on the rules of the exchange), hence these vehicles often being referred to as "cash shells" or "blank cheque vehicles". Many SPACs also have a minimum transaction size requirement of approximately 80% of available funds.
Interestingly, whilst the SPAC can acquire assets through a simple purchase of another entity, there have been a variety of corporate techniques used to make these "acquisitions", including takeovers, mergers with a target and retaining rights in the surviving entity, raising additional funding, being "purchased" by a target (with equity in return) or a reverse takeover where a private (non-listed) company is acquired by the SPAC and then merged with it. As such, they can be seen as a new way of doing an M&A deal and having a suitably wide definition of the permitted "business combinations" for the acquisition provides useful flexibility.
The features will be dictated somewhat by the market and exchange which the vehicle is listed, although there are some fundamental points which will need to be considered and potentially supported by a 3rd party. These are:
High profile recent SPAC IPOs include Richard Branson’s Virgin Galactic (merged and taken public by a SPAC which raised $800m) as well as his recent new business venture through VG Acquisition Corp. ($400m, Cayman Company). US healthcare company MultiPlan also went public in an $11bn merger with a SPAC, Churchill Capital Corp III, which raised $1.1bn in February 2020.
In terms of asset class, SPACs are well known for being weighted to technology and growth companies.
The NYSE exchange has reportedly seen 55 SPACs raising $22.5b as at early September this year. This compares to 59 SPAC IPOs collectively raising $13.6b in 2019.
Whilst the London Stock Exchange has not reached similar levels in terms of both volume and value, the trend is significantly upwards with a 30% increase in market value of SPAC IPOs in 2019, over 50 SPACs over the last 5 year and over $2bn raised since 2017.
Whether listing on the NYSE, Nasdaq, LSE, AIM, or TISE, all will be comparatively more flexible and lighter on regulation than a premium main market listing (which may not be available because of a lack of trading history). Some of the relaxations being provided by exchanges include:
Speculative investors will undoubtedly have their preferences on the type of exchange used, and this will be a key driver for the founders of the SPAC who may wish to attract certain types of investors. We have also seen geographical factors at play, such as the attraction of the UK markets for Asian investors and high-net worth entrepreneurs. SPACs are also attractive to hedge funds which can view the holding as a cash proxy and provide investors who can only invest in listed securities with exposure to private companies with illiquid securities.
A listed SPAC can be used to access a greater range of investors than are typically possible in private equity fund structures which are sometimes restricted to professional and institutional investors by law or regulation.
SPACs sometimes resemble investment funds in that they can have a collective pooling of capital, can be making multiple investments (therefore arguably risk spreading), allow discretion to the management team to make investments on their behalf and invest in similar types of assets as a private equity fund.
The costs associated with establishing a SPAC and its supporting structure are generally lower than those applicable to a fund. A SPAC does not require a fund management company to be established. This saves time and cost of set-up and compliance with regulations applicable to funds and managers.
It should also be noted that SPACs’ investment policies and objectives are not (usually) intended to achieve a spread of risk for investors. The regulatory frameworks of certain jurisdictions and how they identify investment funds can impact on the proposed jurisdiction for certain multi-investment SPACs.
There are a number of advantages to using an offshore SPAC, most notably:
Whilst investment in SPACs should always be considered carefully by investors due to the discretion provided to the sponsors/founders, they are proving to be a real source of market activity and an attractive proposition for experienced private equity experts looking to take advantage of market conditions and deliver quick returns against that next target unicorn.”