A SPAC boom has arrived, led from the US and now spreading across Europe and the UK. Everywhere you turn, people are talking about a SPAC transaction, whether sponsors, investors or target companies.
Following a depressed M&A market during the height of the COVID-19 pandemic, interest in SPAC transactions, as an alternative to traditional IPOs (Initial Public Offerings), have bucked the trend and exploded. There is now over $100bn of investment committed to SPACs waiting to be spent, and more being invested every day.
While a significant proportion of the capital raised to date is sitting in US SPACs, backed by both US and European sponsors, this capital is readily available to UK and European companies looking to generate value from the US markets and access these funds for future growth.
We have seen SPACs operating at all levels of the M&A market, from smaller $15m kick off acquisitions to $4bn takeovers. At the lower end in particular, the significant administrative cost saving for target companies looking to list is driving popularity within fast growth industries such as life sciences, technology (including fintech) and renewable energy.
For investors, SPACs provide lower risk with the ability to exit before the De-SPAC transaction if the target does not suit their investment criteria. Private Equity funds are also increasingly investing in SPACs, adding to investor confidence in the SPAC model and providing the Private Equity investors with potentially shorter return periods and more marketable equity.
It is the combination of benefits for both the investors and the target company that is driving the growth of SPAC transactions, and with plenty of committed capital from 2019 and 2020 SPAC raises, we can expect a flurry of M&A activity during 2021 and beyond. There is also an opportunity for funded SPACs to identify distressed or undervalued opportunities and move quickly to complete a transaction.
The SPAC transaction process can be split into two broad phases: The formation of the SPAC and IPO process, and the De-SPAC transaction.
Formation and IPO process
The SPAC is formed by the sponsors (or founders), usually well-known investors, industry experts or private equity funds, with both the expertise of IPOs and also the sector focus of the SPAC.
The sponsor invests the risk capital in the SPAC to fund the IPO process and in return receives founder shares with a ‘promote’ (a higher profit share entitlement), usually around 20% of the capital at the time of the De-SPAC transaction.
The Sponsor attracts investors who commit funds to the SPAC and completes the IPO process, with investor funds being held in trust. As a cash shell with no operating history, the IPO registration process is more straightforward than a traditional IPO of a Target company. Once listed, the SPAC usually has 18 to 24 months to identify a Target company and complete the De-SPAC transaction.
Following the approval of investors, the Target acquisition is completed, commonly via a reverse merger/takeover, determined in part by the nature of the target company. The investors have the option at the time of the De-SPAC to vote in favour of the acquisition and release their funds for investment in the newly listed target company or to redeem their investment.
If no transaction is completed within the period designated in the prospectus, the investor’s funds are returned and the Sponsor’s risk capital is used to cover costs.
SPACs on this side of the pond
While the initial boom in SPAC IPOs and De-SPAC transactions has been focused in the US, providing a great opportunity for UK and European businesses looking to raise capital, there is an increasing appetite for launching SPACs in Europe and the UK.
However, there are a number of hurdles within the UK listing rules making UK SPACs less attractive than there US equivalent. These include the requirement for trading in the SPACs shares to be suspended when a deal is announced and the ability for investors to redeem their investment at that time.
Consequently, the UK listing market is currently lagging far behind the US in the SPAC boom, and there are arguments both for and against making early changes to bridge the gap.
The recent UK Listing Review, led by Lord Hill, recommends a number of changes to close the gap in respect of SPACs, and also to compete in a post-Brexit world with Amsterdam and other European financial trading centre. The UK government has announced a consultation with the FCA on potential amendments to the UK listing rules that could make UK SPACs more attractive in the near future.
Regardless of the outcome, the popularity of US SPACs compared to traditional US IPOs looks set to continue, as they offer a cheaper and quicker way for target companies to access the US capital markets.
There are many complexities within the SPAC process, including regulatory, tax, accounting, including GAAP conversions, and valuation considerations. Target companies also need to prepare themselves for being a public company, and often in a shorter timeframe than for a traditional IPO. The key is having the right team and partners in place with the expertise to navigate these complexities, to deliver both a successful transaction and the long term business goals of the sponsor and target.
This is the first in a series of articles looking at different aspects of SPAC and De-SPAC transactions, where we are helping founders/sponsors and target companies succeed.