With the SPAC boom hitting just under £1bn for the first Quarter of 2021, Maxim Manturov, Head of Investment Research at Freedom Finance Europe, explains why it might be time for London to finally embrace Special Purpose Acquisitions.
What is a SPAC? Find out here.
Following Brexit, the UK needs to reform its listing rules as a whole to attract Special Purpose Acquisition Companies (SPACs) and tech unicorns”, explains, Maxim Manturov, Head of Investment Research at Freedom Finance Europe. “It is essential that Prime Minister Boris Johnson convinces more fast-growing tech companies to list in the London Stock Exchange (LSE) to make the UK financial markets more attractive.
EU companies have been long tending to prefer the US exchanges over the domestic ones due to more favorable valuation and stock structure.
The UK government wants to change this and has already issued a few proposals regarding the following:
- Allowing a two-class share structure that gives more control to the founders
- Reducing the requirements to the free float to protect the first shareholders
- Easier rules for SPAC companies
US SPACs are currently the favourable choice
SPACs are structured differently in the US than in the UK. New York-listed SPACs allow investors to buy back their shares if they are unhappy with the target company. Meanwhile, in the UK, trading is suspended following the announcement of the merger, which upsets the investors; this is a key difference and the reason why the US SPACs are much preferred.
The Financial Conduct Authority (FCA), however, suggested easing the rules that lead to such suspension, and also said it intends to include a minimum market capitalization and buyback option to protect SPAC investors.
Will companies list in London and will there be an appetite for investors?
Even though the SPAC market has not been that hectic recently, these rule changes will naturally make LSE listing more attractive in the longer term. The results were welcomed by the head of the London Stock Exchange, David Schwimmer.
Continuing to develop the UK listing scheme is key to providing flexibility for companies looking to list in London, while maintaining high standards of corporate governance.
Dual-class share structures were pioneered by tech such giants such as Google and Facebook, giving the founders extended voting rights. Switching to a similar system in London could induce more local unicorns (tech companies that are worth over $1B), such as Revolut and Checkout.com, to enter the local market, and more likely to grow over time, also taking into account that Trustpilot and Deliveroo have already launched their IPO’s in London.
To reduce risks, you need to perform your own analysis. First of all, look at the company’s products, the TAM size, the earning growth, and where the funds raised at the IPO will be directed; this will weed out weaker companies and increase the likelihood of making money on such transactions. It will also probably take time for the global sentiment regarding London listing to start changing for the better, given the new regulations. Finally, it is important how these regulation changes will be brought in, since it is necessary, on the one hand, to reduce the regulatory pressure and, on the other, not to allow high handedness.