SPACs (Special Purpose Acquisition Companies) are still on trend and the ripple effects from the hype in U.S. markets are being felt across UK, Europe and Asia. Numerous high-profile companies have emerged from SPACs over recent years and several SPACs have recently announced deals but are yet to complete their transaction. So, are we set for a bumper year of SPAC deals?
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.
Many major exchanges have begun assessing how they can increase their attractiveness. Lord Jonathan Hill’s report released very recently, calls for a range of deregulatory measures with the intent of making the UK a more desirable market to grow and list companies, this includes more authority to founders post-listing on the London Stock Exchange. This report is very timely especially considering that Amsterdam has overtaken London as Europe’s largest share trading centre in January. The FCA is expected to begin consulting on the proposals contained with Lord Hill’s report.
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 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".
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.
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.
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 quicker returns against that next target unicorn.