The rise of SPACs in the IPO market
February 07, 2018
What is a SPAC?
A Special Purpose Acquisition Company (“SPAC”) is essentially a cash shell set up to raise public funds through an IPO with the aim of making a future acquisition. Recently, as illustrated by the Landscape Acquisition Holdings and J2 Acquisition IPOs in the last quarter of 2017, the SPAC route is emerging as an alternative financing method for deals where a traditional listing, private equity or other traditional funding may not be suitable or readily available.
Unlike other financing methods, a SPAC provides an opportunity for expert managers to raise finance for potential future acquisitions without having a target identified - shareholders invest based on their confidence in the founders’ or management team’s ability to exploit opportunities in their particular fields of expertise. They are often run by former credible executives of the industry or sector they are targeting, and typically have financial backing from PE houses or high net worth individuals.
Notable companies entering the public markets recently through mergers with SPACs, include BCA Marketplace, the operator of the UK and Europe’s largest used vehicle exchange (acquired by Haversham Holdings) and Nomad Foods (acquired by Nomad Holdings), which owns the frozen food groups, Findus Group and Iglo Holdings.
From an investor’s point of view, the main attraction of a SPAC lies in the ability to leverage the founder’s experience to extract value. Using their management expertise and wider network, the founders are able to unlock trapped value due to capital and/or expertise deficit.
SPACs are also particularly attractive to investors who want to engage in private equity style deals with the protection and liquidity afforded by the public markets.
In addition to providing funding the potential benefits of a SPAC to founders are:
- Relatively quick and low cost listing process with the creation of a ‘clean’ shell entity
- Ability to achieve significant fund raising
- Flexibility in identifying and making investment decisions
- Publicly traded - offering liquidity
- Funds readily available to make an acquisition when the opportunity arises
- More transparent corporate structure.
SPACs have been a regular feature of the US IPO markets, where there was an unprecedented number of SPAC IPOs in 2017 which raised $10bn and comprised 6% of global IPO values.
This has had a knock-on effect and helped to drive momentum elsewhere, particularly in the UK. Of the 103 IPOs in the UK in 2017, 15 were SPACs with £ 1.7bn raised from this type of listing.
Furthermore, the four largest SPAC IPOs in the UK – J2 Acquisition, Landscape Acquisition Holdings, Ocelot Partners and Wilmcote Holdings – represented 99.1% of total funds raised by SPACs in 2017. This highlights the resurgence of sizeable SPAC fundraisings on the London markets. Indeed J2 Acquisition’s launch on the London Stock Exchange last year was the second largest IPO in London in 2017, raising $1.25bn - the largest amount for a London SPAC since 2011.
The London market for SPACs is growing as investors and management teams alike have gained confidence in these vehicles and the returns generated. Given some of the notable successes, public investors have been increasingly willing to back the same founders/management teams who are looking to pursue further acquisitions with additional vehicles.
With low interest rates, low levels of market volatility and fewer IPOs of more traditional operational companies, SPACs provide institutional investors with new investment opportunities and provide them with significant returns if the companies are successful with their subsequent acquisition(s).
The momentum from 2017 is continuing and we are seeing a much greater level of interest than ever before in the use of these vehicles with further SPACs included in the 2018 IPO pipeline. Another trend we are seeing is that whereas investors expect founders setting up their first SPAC to specify a particular industry or geographic sector in which they have expertise, those founders with a track record of creating successful SPACs are able to attract investment without identifying any sector.
What is also becoming increasingly common is the use of SPACs by private equity houses as an alternative method of finance to fund M&A. Maybe one day SPACs of this nature will be better known as private equity public investment companies (or PEPICs)?
This trend along with the increase in the number of SPAC IPOs in the past year will inevitably lead to an increase in M&A activity as the SPACs seek to fulfill their acquisition policy and meet their investors’ expectations.