Return of the SPAC
October 21, 2020
A Special Purpose Acquisition Company (SPAC) is essentially a cash shell set up to raise public funds through an initial public offering (IPO) with the aim of making a future acquisition. Having fallen from favour, recent market activity suggests they may now be back in vogue.
In YTD 2020, US markets have seen more than 90 SPAC IPOs raising in excess of $30bn, significantly up on the previous annual highest amount of c.$12bn. The volume and magnitude of the current wave of SPACs reflects the increased appetite for these vehicles and for larger deals.
So why have SPACs returned?
Amid the impact of COVID-19, SPACs have become an attractive market option to both raise capital and, for target operating companies, to execute an IPO. They offer execution flexibility and deal pricing advantages, particularly at a time where the timing and length of IPO windows is uncertain.
On the demand side, equity investors are increasingly comfortable with the structure and returns of SPACs.
These factors, allied with a lower level of traditional IPOs, are increasing the potential pool of capital and the chances of both successful SPAC launch and target acquisition.
What are the emerging trends?
Previously, SPACs have often targeted returns through acquiring companies perceived to be ‘under-valued’. But several recent SPACs have signalled a shift to targeting growth companies. The $4bn Tontine SPAC recently launched on NYSE by Bill Akman will target mature unicorns. Unicorn SPACs provide investors with the tantalising prospect of access to the next ‘big thing’ - companies that may not otherwise have come to the public markets at that particular stage of their lifecycle.
The deal dynamic is also shifting. Rather than transactions being a product of the SPAC identifying targets, potential targets and IPO candidates are now actively seeking out SPACs to reverse into.
On the founder side, private equity houses are increasingly active - both in originating SPACs to increase their fund offerings and using SPACs as a viable exit option for portfolio companies.
What about the UK?
US trends have historically had a knock-on effect on SPAC transaction volumes in the UK. We have seen signs of renewed interest in UK SPACs, but whether this will yield an uptick in completed transactions is unclear.
Unlike in the US, UK SPACs do not typically offer an investor a right of redemption - effectively a ‘vote’ on the acquisition - at the point at which a target is identified. This difference may appeal to a founder of a UK SPAC, as it provides funding certainty. However, investors see this as less attractive than a US SPAC and they ultimately hold the balance of power in the current environment. So at this point we are unlikely to see the same level of SPAC IPOs here in the UK.
Rather than an increase in new UK SPAC IPOs, we are seeing an emerging dynamic where UK businesses, including UK unicorns, consider a tie-up with an existing US SPAC to effect a US IPO.
Expect more SPAC M&A activity in 2021: As more SPACs come to market, competition for investors and attractive target companies intensifies. It will be interesting to see how this evolves. We certainly seem set for a wave of SPAC M&A in 2021 as SPACs deploy their funds.
SPACs are probably here to stay: SPACs and their place in the IPO landscape is stimulating a lot of debate. Advocates have been vocal on the advantages that they offer in executing an IPO during these uncertain times. However, there are also some murmurings around their relative market performance and the risks associated with using them to bring businesses, including those that are less mature, to the public markets under an accelerated timeframe. While there will undoubtedly be peaks and troughs in volumes, SPACs seem set to become a permanent fixture in the listings landscape, particularly in the US.
SPACs are not a shortcut: For companies considering the SPAC route, we would highlight that these should not be seen as a shortcut to IPO. It is crucial that a clear understanding of the implications for the business is understood - both to execute the IPO but also continuing life as a listed business.
Key characteristics for a new SPAC: Finally, we see the following as key for a successful SPAC IPO:
- The founders’ past record in delivering attractive returns and their industry expertise to enhance shareholder value. Related to this, confidence in the founders’ team to identify and execute the right acquisition.
- Alignment of both the founders’ and investors’ interests. Founders should have a material personal stake in the investment vehicles as an incentive to perform and not necessarily be able to cash out completely at the point of the first acquisition.
- Establishing a high quality board of directors with relevant industry expertise to ensure appropriate governance.
See what we said about the rise of SPACs when they started to rise in popularity in 2018.
If you’re thinking of exploring a SPAC, do get in touch.