Rise of the SPAC company: What are they? And are they set to dominate the UK IPO market?

A growing trend within the global M&A industry has been the increased interest around Special Purpose Acquisition Companies – also known as SPACs. In short, they are organisations that have no commercial operations, and they are formed purely to raise capital through an initial public offering (IPO) with the aim of acquiring or merging with an established business. Over the past few years, they have become increasingly popular in the USA, and have started spreading across the globe. But how will they impact global markets in the years ahead? Business Leader investigates.

According to a report by White&Case and Mergermarket, SPAC IPOs last year reached a value in excess of $172.2bn from 679 listings around the world. This was an increase from 248 in 2020.

Although SPACs were initially introduced in 1993 and described as ‘the poor man’s private equity funds’, and have suffered from negative publicity over the past three decades – they have grown in number and value recently to record levels. Will the growth trend continue, or will the ‘blank check boom’ come to an end?

Why has there been an increase in popularity?

After an inauspicious start to life within the economic hotspots of the world, there has been a dramatic switch in investor’s views of SPACs.

Imran Anwar, Chief Financial Officer at Epos Now explains the step change within the industry. He comments: “SPACs have experienced an extremely bright growth in the last few years. This is primarily due to the change in perception towards this route. Once viewed as a last resort for a public listing, due to them appearing aggressive and often requiring significant discounts from market value, SPACs are now seen as a very viable and attractive option for businesses looking to be listed on stock exchanges. This is mainly due to the excess capital available in the markets driving pricing to be more akin to traditional IPO pricing, making this route more appealing to businesses.

“Secondly, the profile and nature of businesses trying to obtain a public listing are now very different to those of the past. Previously, traditional businesses would have strong track records of delivery, growth, and often profit embedded for many years, enabling a strong equity story to be shared with investors. However, we are seeing much more nascent businesses wanting to access the public markets, and SPACs offer them a secure route in an uncertain market.

“Lastly, many companies are now using SPACs as a way of accessing strategic partners with whom they do not have an existing relationship. This is primarily due to the fact that there is not the same level of disclosure when it comes to SPACs, allowing companies to have control over their messaging, and thus being able to manage relationships with their strategic partners.”

Another driver in the growth of SPACs has been its wider availability to new investors. Laura Hoy, Equity Analyst at Hargreaves Lansdown explains: “SPACs have been popular over the past few years as retail investors look for opportunities to participate in IPOs they’d otherwise be shut out of. The appetite for early-stage investing among average investors has been growing, and it’s led some companies to offer customers the opportunity to invest, as we saw when Deliveroo went public.

“SPACs are another way retail investors can get in on the ground floor of an IPO – but it can be a risky business. While many SPACs offer a general investment theme, like electric vehicles or space travel, there’s no way to know whether they’ll stick to it, or whether they’ll take a company public at all. Buying a SPAC is somewhat of a gamble because investors have no idea what company it will eventually take public.

“New regulations in the UK means we can expect to see more SPAC listings on the LSE, but the frenzy of activity seen in the US in early 2021 is unlikely to repeat.”

And as much as the US have been the key region accelerating the acceptance of SPACs, the UK is starting to make its mark.

Chris Locke, UK Financial Services Strategy & Transaction Partner at EY, comments: “The perceived benefits of SPACs typically include greater certainty of pricing for the target companies versus a straight IPO, a shorter timeline to list, investor access at an earlier stage in the growth cycle, and attractive returns for the SPAC sponsors themselves.

“For these reasons, SPACs are now beginning to garner more attention here in the UK. This is largely as a result of changes that have been implemented following The Listings Review by Lord Hill in 2021, which aimed to make the city a more competitive and agile location for investment.

“The changes have included increasing the number of routes UK IPOs take to get to market, and a revision of the rules to better enable SPACs to take place in the UK, of course with the necessary guardrails in place.

“November 2021 saw the first UK SPAC, when venture capital group Hambro Perks sought to raise £150m to fund an acquisition through listing on the London Stock Exchange.”

Differences from regular IPOs

With more regular IPOs also seeing a surge in popularity in recent years, to a well-established and traditional industry, it can be difficult to understand why the sudden interest in SPACs has increased.

To get a better grasp on the rise of the SPAC, it is key to understand what separates them from any other type of company.

Svetlana Marriott, Partner in KPMG UK’s Capital Markets Advisory Group, explains: “Pros include the factors set out above – it is potentially a quicker process being an M&A transaction, companies can also benefit from the standing and the experience of the SPAC’s sponsors.

“Cons from the investor perspective relate to potential dilution from the sponsor, as well as potential reduced level of diligence of the company coming to public markets, compared to an IPO verification exercise. Accelerated access to market can be both a positive and a negative for a target company – in particular, the risk of being subject to public scrutiny and ongoing obligations as a listed business before they are ready. So, preparing for an IPO early will put management in control, provide optionality and is a great way to mitigate any such acceleration risk.”

Locke continues: “SPACs are generally seen as a quicker route to listing for target companies when compared to the traditional IPO route. For the target company, they also avoid the need for significant time to be spent on roadshows or investor engagement, and they give pricing certainty before going through the listing process. One of the biggest advantages of a SPAC is its agility – and whilst some would consider the shelf life a disadvantage, it does support a more focussed approach.

“One downside is that it can require a compressed and challenging timetable to work through the de-SPAC process, and there are concerns around the erosion of value to the sponsors versus the traditional listing. In addition, there can be potential erosion of control of the day-to-day running of the business.

“SPACs also have a limited shelf life of approximately 18 to 24 months. Money is held in trust while a suitable investment is found. This means there can be substantial pressure on the team to deploy finance, especially as time ticks on.”

Will the popularity continue?

Despite the downsides presented by a SPAC, investors in recent years have warmed to the positives that they can provide. And after the recent rapid growth and success of the companies, many are predicting a bright future.

In an industry that can be hard to predict, and after what the world has been through in recent times, what could happen this year and beyond?

Locke comments: “Some investors may decide to take a ‘wait and see’ approach to SPACs, certainly in the short term, as they consider the learnings from the US market, where over 600 SPACs raised $145bn in 2021.

“After a phenomenally rapid rise in SPACs in the United States, there are pockets of concern around poor share price performance of target businesses post-listing, increasing redemption rates and challenges to forward guidance being provided in the market. This appears to have resulted in a current cooling of appetite for SPACs in the short-term while investors wait to assess the performance of the existing crop of SPACs.

“Dependent on the evolving track record in the US, it’s possible there will be more interest in SPACs developing in the UK in the first half of the year, spurring on further activity in the second half, especially if the country emerges from the current pandemic-related challenges and businesses look to make the investment and growth decisions many predict.”

Hannah Skingle, Senior Marketing Associate at Beauhurst, provides her predictions for the UK market: “In response to Lord Hill’s UK Listings Review, the FCA loosened rules on SPACs, most notably allowing them to continue trading after the announcement of a deal (if certain criteria are met). Since then, we’ve seen a number of leading UK businesses list via SPAC, including unicorn companies Babylon and Cazoo, as well as ArQit, LumiraDx and Wejo.”

There are several other key differences presented by a SPAC. Skingle continues: “SPACs are often formed by high-profile individuals with plenty of experience and industry knowledge, acting as the main selling point in the vehicle. The sponsors are often the face of the fundraising initiative and will be some of the key decision-makers when it comes to the acquisition.

“This focus on business celebrities has certainly contributed to the frenzy of SPAC media attention in the US, where plenty of big names like Shaquille O’Neal and Alex Rodriguez have thrown their hats into the SPAC ring. The celebrity-turned-business-mogul model is simply just not as popular or high-profile in the UK as in the US, but that’s not to say SPACs can’t thrive this side of the pond.”

is the UK attractive for SPACs?

Despite the challenges the industry is facing, there is no denying the rise in popularity could continue for years to come. Syed Rahman, of financial crime specialists Rahman Ravelli, assesses the likelihood of the UK attracting SPACs.

He comments: “Nobody likes to miss out on what could be the next big thing. So, when the FCA made substantial changes to its rulebook last year in order to attract a slice of the SPAC action, there were many who thought it could be a game changer. There was, after all, enough support for the move from those looking to sink money into SPACs.

“It was easy enough to see both the appeal of SPACs and the aims of those looking to see them become a possibility in the UK. By 2021, SPACs were attracting ever higher levels of investment in the US, prompting envious glances from this side of the Atlantic. But fast forward to early 2022 and the UK has only seen one SPAC so far, with little sign of there being more in the pipeline.”

With this in mind, has the UK missed the opportunity and been left behind by its American equivalents?

Rahman continues: “So, did the SPAC bubble burst before it could land in the UK? This is doubtful. The obvious enthusiasm for SPACs has not evaporated – and it was never likely to take the form of a stampede the moment the FCA changed its rules. It could be argued that some of the UK’s regulations remain more rigid than those in other countries, but the rise of SPACs in the UK was always likely to gather momentum gradually rather than being a sprint that was over shortly after it began.

“Nobody was looking for that to happen and the FCA had stated that it wanted listing standards that would ensure the integrity of this new market. The regulator adopted a more accommodating stance. It dropped the requirement for shares of a listed company to be suspended when a reverse takeover becomes widely known about, and reduced its proposed £200m minimum for SPAC fundraising to £100m (a figure which is similar to that in other countries seeking SPAC investment). But it also protected investors by giving them rights to redeem funds and introduced limits on how long a SPAC would have to complete a deal.

“The FCA may have wanted a well-managed gold rush, but it did not want to see The City become a SPAC-filled ‘Wild West’. While London has not yet become a magnet for SPACs, it is certainly now as appealing as many of its potential rivals.”