A wave of passion for special purpose acquisition companies is washing from the US to other shores.
Long a funding backwater, special purpose acquisition company (SPAC) offerings are moving like a riptide these days. As more fast-growing companies eschew traditional initial public offerings (IPOs) because of pandemic-induced market volatility, SPAC IPOs are quickly becoming their alternative of choice and are even drawing attention outside the US.
Gross 2020 SPAC proceeds stood at $62.7 billion as of November 8, compared with $13.6 billion in all of 2019. Deal counts were 170, versus 59 in 2019 and 46 in 2018, according to SPACInsider. In the third quarter, SPAC IPO deal counts and aggregate values were almost equal to those for traditional IPOs.
“The [traditional] IPO market for high-growth technology companies has not been as frothy as in years past, given the market uncertainty created by Covid-19 and the general global economy,” Albert Vanderlaan, partner in global law firm Orrick, Herrington & Sutcliffe, tells Global Finance. “There is quite a bit of pent-up demand by investors looking to deploy capital into earlier-stage high-growth companies.”
SPACs, which have been around for decades, have no commercial operations of their own. Rather, investors, termed sponsors or founders (the terms are interchangeable in this context), raise money via IPOs, with the express purpose of acquiring or merging with a burgeoning enterprise in a business sector where they (presumably) have some expertise. Sometimes called “blank check companies,” SPACs typically have two years to purchase or merge with a target; failing this, they return to investors the principal raised in the IPO. These days more than 90% of SPACs complete acquisitions, according to Tim Manning, managing director at investment bank Cowen.
Latin America: In July, HPX raised $220 million in an oversubscribed SPAC IPO and became the first blank-check firm to target Brazilian assets. Led by Rio de Janeiro native Bernardo Hees, HPX became “the fifth SPAC searching for a deal in Latin America” this year, according to SPACInsider.
Middle East: In October, Israel-based ION Acquisition 1 opened on the New York Stock Exchange after raising $225 million in a SPAC IPO that pledged to target Israeli businesses that apply technology and innovation to everyday life.
Asia: In mid-October, Bridgetown Holdings, a blank-check company created by PayPal co-founder Peter Thiel and billionaire investor Richard Li, announced it had raised $550 million in an IPO that pledged to invest in “new economy” sectors in Southeast Asia—especially technology, finance and media companies.
Europe: Even though European banks like Credit Suisse and Deutsche Bank have been active SPAC underwriters, the region hasn’t seen more than 13 SPAC listings total since 2016. The lone SPAC listing on the LSE in 2020 so far, Martin Franklin’s Harvester Holdings, was reportedly withdrawn due to lack of interest.
The higher quality of sponsors has helped get more attention for SPACs, Olympia McNerney of Goldman Sachs noted recently in a podcast. Not only have prominent investors like Bill Ackman, Michael Klein and Peter Thiel been going the SPAC route, but so also have noninvestment types like former US House Speaker Paul Ryan and baseball executive Billy Beane (the central figure in the best-selling book about statistics in baseball Moneyball: The Art of Winning an Unfair Game).
SPACs are historically a US phenomenon, but that too could be changing. “We are seeing interest from sponsors and investors around the globe,” Doug Adams, global co-head of equity capital markets at Citi, tells Global Finance. The past year has seen SPAC IPOs from Latin America to the Middle East to Southeast Asia. [See box, next page].
Europe is a bit of a laggard. There is “plenty of sponsor interest” in the UK, according to Paul Amiss, London-based partner at law firm Winston & Strawn, “but no market for SPACs exists.” UK-listed SPACs don’t typically offer a redemption option as do US deals, where investors can get their money back if they don’t like a proposed merger. There are also restrictions on when investors can trade shares. Some high-profile SPAC failures in the recent past haven’t helped either, Amiss added.
In general, European offerings raise more money than US SPACs—the average SPAC IPO size globally is $369 million in 2020, up from $230.5 million in 2019, according to SPACInsider—and the new shell company will often make multiple acquisitions, whereas US SPACs tend to make one large transaction. “European SPACs are also more flexible and able to complete their acquisitions more quickly, because of less restrictive regulation at the European stock exchanges and, in the UK, the absence of the requirement for investors to vote on all suggested acquisitions,” according to global law firm Dentons.
However, this flexibility often comes at the expense of investors, who have less time to review documents and no redemption option. That said, the London Stock Exchange (LSE) is said to be reviewing possible rule changes to spur more SPAC IPOs. Adams expects regulators and non-US stock exchanges to eventually allow SPAC structures similar to those in the States.
Targeting Growth Equity
Many believe SPACs will stay popular even after the pandemic abates. “We are finding many companies now considering merging with a SPAC as an alternative to the more traditional alternatives of sale or IPO,” Adams says. “Year-to-date in the US, there have been almost as many SPAC IPOs and proceeds raised as there have been in traditional IPOs.” The Citi executive expects to see more SPACs targeting growth equity companies.
Others aren’t so sure. SPACs are “fraught with peril for investors,” warns Tyler Gellasch, executive director of the Healthy Markets Association. Investors often have only a short time to review disclosures. Traditional IPOs, by contrast, require months for investors to uncover potential flaws, as happened in the canceled WeWork offering. “That doesn’t happen with a SPAC,” Gellasch adds.
What’s more, SPACs have historically underperformed traditional IPOs. A recent Goldman Sachs study found that blank-check companies outperform their broader equity markets in the first month or so after a deal is announced, but underperform once the merger is complete. Renaissance Capital likewise found returns from post-merger SPACs badly trail traditional IPOs.
But past is not necessarily prelude to the future, particularly as top-tier investment banks have gotten on board more recently. As a result, “a higher quality sponsor team has emerged,” Amiss says. He points to Goldman Sachs as a relative newcomer that touts its SPAC record, which overperforms the market. “They are very selective about which teams they back,” Amiss notes. The Renaissance Capital report also found that SPAC mergers in 2019-2020 outperformed earlier ones.
The redemption option that is attached to most SPAC offerings has been popular: If investors like the acquisition, great; but if they don’t, they can get their money back, which seems like a pretty good deal. But this downside protection may be more “illusory” than real, Gellasch notes. Having sunk money into a SPAC for six, 12 or even 18 months while sponsors hunt for promising targets, few institutional investors are going to walk away right before a merger. “It is very difficult for a professional investor to do that,” says Gellasch. From an issuer’s perspective, SPACs are “great,” he summarizes; from an institutional investor’s standpoint, they are “not so great.”
That said, innovative tech firms, among others, are in much demand these days—particularly with all the liquidity in the global economy—and merging with a SPAC arguably offers a faster, surer, more flexible path to public capital markets. The blank-check company typically has a clean balance sheet and no unexpected liabilities—because it hasn’t conducted any material business. In short, high-tech entrepreneurs may get better terms from a SPAC combination.
“I don’t think SPACs are going anywhere soon,” Vanderlaan says. “The surge in SPAC IPOs will certainly put pressure on sponsors to find and execute on deals, but there are still plenty of companies out there that would find this route to going public to be attractive.”