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Why is nobody talking about SPACs anymore?

Market Update

Why is nobody talking about SPACs anymore?

We’ve written about Special Purpose Acquisition Companies, or SPACs, before. These have become increasingly popular, in the US at least, as an alternative way for a company to go public, rather than taking the traditional IPO (Initial Public Offering) route. SPACs are a quick and cheap way of going public, as we explained in our Market Update: What are SPACs, and should investors take notice?

Earlier this year, SPACs were rarely out of the financial headlines. In 2020 there were 248 SPACs launched in the US, raising $83 billion, six times the amount raised the previous year. But that record has already been eclipsed. Data from SPAC Research show that over 300 SPACs have already gone public so far this year, accounting for more than $100 billion in raised capital. In the US, famous faces from showbusiness and sport rushed to associate themselves with SPACs and this helped boost what otherwise would be a somewhat esoteric investment vehicle. But things were different in Europe where the interest in SPACs lagged that found in the US. Reuters noted in December that only around 10 SPACs were planned for 2021 each with a fundraising target of about $300 million.

Europe and the UK lags

It’s no surprise that the US has completely outstripped Europe and the UK when it comes to listings via SPACs. There is a strong appetite for fundraising, particularly in tech, in the US and plenty of money looking for a return. But it’s still surprising that Europe lags to such a large degree. As for London, bankers have been warning that the City looks set to lose out to Amsterdam as an epicentre for European SPAC listings. The rules in Amsterdam are more flexible than those in London, so that’s where investors are heading.

Relaxing regulations

In London, trading gets suspended as soon as a SPAC, or ‘blank cheque’ company, announces its merger target. This means that early investors miss out on any ‘pop’ in the share price following the announcement. But there’s plenty of support for a relaxation of the rules for SPACs in the City. London Stock Exchange (LSE) CEO David Schwimmer has said the UK should replicate US SPAC listings to boost London’s appeal. He’s not alone. Earlier this year saw the release of a review into listings in the UK led by Lord Hill, the former EU financial stability chief. One of the review’s key proposals is to relax rules around SPACs. The recommendation was welcomed by Chancellor Rishi Sunak. Now it turns out that this high-level lobbying has paid off for fans of SPACs. At the end of April, the Financial Conduct Authority (FCA) announced that it was considering a relaxation in the rules around Special Purpose Acquisition Companies. But all this looks as if it may be a waste of effort. In fact, the City may have had a lucky escape, depending on the next steps taken.

Fresh questions

In the US, the outfit responsible for stock market regulation, the Securities and Exchange Commission (SEC), has cast a beady eye over the industry and expressed some concerns. It has suggested that the warrants, an integral part of a SPAC for early investors, may have been miscategorised in accounting terms. The news sent the prices of many SPACs plunging, and the current uncertainty has tarnished SPACs to such an extent that issuance has slumped.

Even before this latest news there were concerns that the market for SPACs in the US was looking bubbly. Microsoft founder Bill Gates recently said that whereas companies used to wait too long to go public, now they’re too quick. Some SPAC targets can’t even show sales, let alone boast profits. In addition, in the US, SPACs can publish highly optimistic financial projections without the same scrutiny as in a traditional IPO. This is leading to problems with the recent listing of electric vehicle start-up, Canoo Inc., a case in point. Within a few weeks of going public, the company was hit by a flurry of lawsuits from investors who claim that they bought stock on the back of misleading information.

For company owners, selling to a SPAC can be an attractive option. For a start, it can add up to 20% to the sale price compared to a typical private equity deal. Being acquired by a SPAC can also offer business owners what is essentially a faster IPO process under the guidance of an experienced partner, with less worry about the swings in broader market sentiment. In addition, if the SPAC fails to complete an acquisition within two years, funds must be returned to investors. This is a great attraction, as initial investors simply get their money back. And this is really the key to SPACs: as an investor you want to be able to get in early.

What are the caveats?

As for the retail investor, the advantages aren’t so obvious. The opportunities to buy into a SPAC generally come in the secondary market. But you won’t get a warrant with your shares as initial investors do. Then it’s all about the acquisition target, and ultimately the price paid for it. You may get lucky. But bear in mind that those at the beginning of the process way well have cashed in already and moved on to better money-making opportunities. Given all this, perhaps it’s no bad thing if the hype around SPACs is coming to an end. Hopefully UK regulators won’t spend too much of their valuable time jumping on a bandwagon that looks like it’s about to crash into the buffers.

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