Special Purpose Acquisition Companies (SPACs) have seen a meteoric rise in the US. The records broken in 2020 have already been surpassed, and within the first three months of 2021, it now stands as a $700 billion market.
Despite this extraordinary success, Europe – where there is potential for exceptional SPAC growth – has been reluctant to capitalise on the trend.
What is a SPAC?
SPACs, also known as ‘blank cheque companies’, are formed with the sole intention of raising capital through an initial public offering (IPO). SPACs have no existing commercial activities, so investors are placing their trust in the sponsor of the company.
This has been interpreted by many as risky as the company does not declare a target acquisition to avoid the traditional IPO route.
Capital raised through the IPO is then used to acquire an existing privately held company. SPACs typically begin trading at $10 per share and the money raised is placed in an interest-bearing trust while the company attempts to make an acquisition.
The sponsors are usually given two years to identify a target, but investors can vote to extend this. If the company fails to acquire within the agreed period, the company is liquidated, investors’ money is returned, and the sponsor of the SPAC loses their initial investment.
Once sponsors and investors agree on a target for acquisition through a reverse merger, the target’s existing stakeholders often become majority owners of the new entity; this is referred to as a de-SPAC transaction.
SPAC investors and sponsors own part of the new entity, with the sponsors often taking a large stake for a relatively low cost.
Although SPACs are not new, they have recently seen a significant increase in popularity for several reasons.
Firstly, they are a faster and cheaper avenue to the public markets than traditional IPOs. They can market themselves using forward-looking projections, which is particularly advantageous for fast-growing companies that may not yet be profitable.
Additionally, they are more effective than the IPO process at making private companies public during times of market instability and high volatility. This is particularly pertinent in the current economic climate, with smaller companies aiming to mitigate financial damage from COVID-19 and wealthy investors seeking good prospects.
Why are SPACs in the news now?
2020 marked a record-breaking year for SPACs with $83bn raised across 248 IPOs. For instance, a social capital SPAC Hedosophia, established by Chamath Palihapitiya, raised $600m and acquired a 49% stake in Virgin Galactic.
Investor and hedge fund manager Bill Ackerman also established his own SPAC, Pershing Square Tontine Holdings, which raised $4bn.
This unprecedented growth has continued throughout 2021. As of March 22nd, 276 SPAC IPOs have debuted with gross proceeds of nearly $90bn.
Furthermore, sponsors have found target acquisitions in less than half the time that they did in 2020, taking 175 days on average.
One company that aims to use SPACs is WeWork, which recently announced that it is looking for a $1bn investment and a valuation of $9bn through a SPAC called BowX Acquisition Corp.
This news follows a failed $47bn IPO attempt in 2019 and a reported $3.2bn loss in 2020.
The company appears to be attempting to leverage a forecast office occupancy of 90% by the end of 2022 and $7bn in revenues by 2024 to attract investment, something that would not have been possible through the traditional IPO process.
In contrast to the American market, European demand for SPACs has been muted, exhibiting a lower level of activity dealt in smaller cash shells.
CNBC reported only three SPAC listings in Europe in 2020 for a total of $495m.
The main cause that has been attributed to this lack of investor demand is low confidence in the European SPAC model.
Some key distinguishing features in the UK is that there is no requirement for IPO proceeds to be placed in a ring-fenced trust account or for acquisitions to be subject to shareholder votes.
Despite this, there is great potential for SPAC growth in Europe.
New York based SPACs are increasingly considering opportunities within Europe, particularly within tech start-ups.
Makram Azar, CEO of Golden Falcon Acquisition corp., points towards 60 TMT and Fintech companies as desirable targets.
The European technology start-up sector could provide fertile ground for SPAC growth as the sector raised a record $41bn in 2020.
London has specifically been identified as a potential locus for SPAC activity since it is located in a country that features 20 of the 60 companies identified by Azar, which will be looking to rejuvenate themselves post-Brexit.
Furthermore, aligning European SPAC structures to the US model could cultivate new investor demand and raise investor confidence whilst also attracting established investors who have confidence in the US structure.
Even so, questions remain regarding the long-term popularity of SPACs. In the U.S. many SPACs are chasing a limited number of good deals. As attractive prospects dry up, SPACs might be forced to sit on the investor money before dissolving the trust, in turn tying up investor funds for limited benefit.
Alternatively, they may recruit worse candidates for lower returns. It is therefore possible that SPACs will struggle to maintain their current popularity in the long-term.
Concluding Remarks
SPACs can provide greater flexibility, efficiency, and certainty than traditional IPOs. Some critics remain sceptical, citing a lack of scrutiny in the SPAC IPO process. For example, the SEC is carefully watching how company ownership is disclosed and how acquisitions are tied to compensation.
However, SPACs have matured into an attractive avenue to public markets, with corporate leaders, private equity firms, and investors buying in. SPAC activity in the US has boomed and whilst uptake has been slower in Europe, there appears to be potential for activity to accelerate off the back of a growing tech start-up community.
However, its long-term viability remains unclear. As markets stabilise in a post-COVID-19 world and a greater number of SPACs chase a limited number of appealing prospects, there is a strong possibility that the extraordinary growth of the SPAC market could end in the near future.
