The SPAC frenzy: Too little too late for London?

Financial Services | Mergers & Acquisitions | Reports

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The UK is finally opening its arms to Special Purpose Acquisition Companies (SPACs), but according to Maxim Manturov, Head of Investment Research at Freedom Finance Europe, this momentum may soon be grinding to a swift halt.

Following Brexit, the UK is finally starting to relax its listing rules to attract SPACs and tech unicorns to public markets. However, with US regulators now launching an investigation into the blank cheque frenzy, it seems that it may be too little too late for the London Stock Exchange (LSE).

London expected to open its arms to SPACs and their investors by mid-2021, but just days before the Financial Conduct Authority (FCA) initiated this easing process, the US securities regulator has opened an inquiry into Wall Street’s blank cheque frenzy. Specifically, regulators are seeking greater information on how underwriters are managing the risks involved, raising concerns that UK efforts will fail to get off the starting blocks.

So, let’s dive deeper into the history of the US SPAC vs the UK SPAC debate. EU companies have long been tending to prefer US exchanges over domestic ones due to more favourable valuation and stock structure.

The UK government, however, 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 FCA, however, suggested easing the rules that lead to such suspension, and also said it intends to include a minimum market capitalisation and buyback option to protect SPAC investors. But with recent consultations into US SPACs, it seems London may have missed their chance to benefit from this craze.

Will companies list in London and will there be an appetite for investors?

Since the FCA began relaxing its listing rules to attract blank cheque companies, less than 25 have listed globally, compared to over 300 between January and March. A lot of this comes down to what’s happening in the US, but there is also evidence that appetite for SPACs is slowing amongst retail investors, with many city investors concerned by the lack of regulation or oversight.

That being said, while the LSE was clearly late to the game when it comes to SPACs, failing to open up its market completely would be more detrimental, with high-earning investors taking their cash elsewhere. As a result, all the UK can really do now is continue to relax its listing rules, while steering clear of shouting about this news to avoid embarrassment in the US.

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