Short for Special Purpose Acquisition Company, a SPAC is a publicly listed firm with a two-year lifespan, during which time it is expected to find a private company with which to merge and in the process, bring it to the investing public.
For a private company it is a potentially faster route to market than the traditional IPO, Initial Public Offer. The sponsors also claim it is cheaper and provides more certainty as to pricing. Since the start of 2020 these “blank cheque” vehicles have raised more than $180 billion in the US. This is excellent news for the equity market and the companies involved but the trend has almost entirely bypassed London, which is suffering from a bad case of FOMO, Fear of Missing Out. Under present regulations trading of a SPAC's shares is halted when it identifies an acquisition until details of the deal are compiled and disclosed within a prospectus.
Hence the Treasury review, by former EU financial services commissioner Lord Jonathan Hill, has called for a relaxation of the UK’s listing rules to capture our share of the SPAC boom as the current rules are a ‘key deterrent’ for investors. It urged the Financial Conduct Authority (FCA), to develop ‘appropriate’ regulation. Xavier Rolet, former head of the London Stock Exchange Group, has said the UK should strive to become a centre for SPAC activity in the wake of Brexit. Changes would encourage UK businesses to list at home and place London on the same footing as Amsterdam, which has emerged as Europe's SPAC hub. Anyone recall reading about the Dutch tulip bulb market bubble?
Since the start of 2020 these “blank cheque” vehicles have raised more than $180 billion in the US.
Clare Cole, director of market oversight leads the regulator’s response. Under the FCA’s new proposals, in order to avoid suspension a SPAC will have to fulfil a number of requirements, including raising £200m when they list on the exchange and ensuring public shareholders’ cash is ring-fenced to either fund an acquisition, or be returned to them. The FCA believes the proposals will both increase transparency and encourage larger SPACs with experienced management to list in the UK.
The question we are concerned with is, are SPACs suitable for private investors?
The question we are concerned with is, are SPACs suitable for private investors? Apart from those with a declared appetite for High Risk securities the answer is no. It may be too early to judge but despite the hype, performance has been mixed. An academic paper posted in November studied a cohort of 47 SPACs that merged with their targets between January 2019 and June 2020. They divided this into two groups, those with high quality sponsors (well-known funds or individuals with substantial expertise and credibility) and the rest.
The results were interesting. The average mean return on the cohort compared with the benchmark over six months was -10.9% and over twelve months that figure was -21.5%. However, the figures for the High Quality set were +22.5% and +9.7% whilst the others were shocking with -41.0% and -45.7%.
Stock selection is key but already the SEC, Securities and Exchange Commission have put the brakes on. It used a simple accounting change guiding that warrants, which allow executives and early investors to buy shares at a later date at a fixed price, the key incentives employed in most transactions, should be considered as liabilities on the balance sheet. The change could force many SPACs to restate their financials.
Stock selection is key but already the SEC, Securities and Exchange Commission have put the brakes on.
Back in the UK, the second hand car retailer Cazoo has announced it will be going public on the New York Stock Exchange via a $7 billion merger with a SPAC called AJAX1. The merger will generate $1.6 billion of which $1 billion is going to the company and $600m is for existing shareholders cashing in some of their stake. They will still own 79% of the company after the deal, SPAC investors 10%, the private investors 9.9% and the sponsors 1.1%. The pro forma value of all the shares in the company will be $8.1 billion – it was last valued at $2.5 billion in October. An exceptional return for the existing shareholders in a company not expected to make a profit until 2024. As for the investors in the SPAC, there are better alternatives in the industry.
¹ Klausner, Michael D. and Ohlrogge, Michael and Ruan, Emily, A Sober Look at SPACs (October 28, 2020). Yale Journal on Regulation, Forthcoming, Stanford Law and Economics Olin Working Paper No. 559, NYU Law and Economics Research Paper No. 20-48, European Corporate Governance Institute – Finance Working Paper No. 746/2021, Available at SSRN: https://ssrn.com/abstract=3720919 or http://dx.doi.org/10.2139/ssrn.3720919
Illustration Adam Mallett