The recent explosion in the use of special purpose access companies (SPAC) as a backdoor for investment into private limited companies, not listed on a securities exchange, is showing no signs of slowing, with record-breaking investments being facilitated by these structures. Here, Charlotte Gregory and Andrew Mazeika explore these trends.
To understand this trend, it is important to note that there are a limited number of ways to offer a private limited company’s shares up for investment to the public, the principal method being through an initial public offering (IPO) of the company’s shares on an equities exchange (e.g., London Stock Exchange’s Main Market, AIM, etc.).
The main difficulties with an IPO are the requirement for minimum market capitalisation and the need for a company to be sufficiently large to justify the work of listing (e.g., the time obligations on directors and senior staff, the extensive costs of advisors (legal, accounting, etc).
Some of these challenges can be mitigated by utilising a SPAC, which is a company incorporated and listed on an equities exchange for the sole purpose of acquiring a private limited company. The exact target company of the SPAC will not be known at the time of the IPO, but certain parameters of a desirable company may be published (e.g. the industry or geographic location, etc.). When using this model, investors are not investing directly in the private limited company in question, they are instead, effectively doing so by investing in a non-trading holding company (the SPAC) which will be the 100% owner of the private limited company. You can read more about this here and here.
SPACs have unlocked vast swathes of the market to investment, particularly in respect of companies that are not large or established enough to undertake an IPO, such as start-up companies or those operating in the fintech space. The benefits of employing a SPAC include acceleration of the development and growth of the target company and increased valuation of the target company. SPACs have been heavily utilised as investment vehicles for Fintech companies in the US, which is undoubtedly the epicenter of the SPAC earthquake. Fintechs are particularly well placed to exploit the SPAC structure due to their often flexible nature and need for rapid capital injections to maintain explosive growth. Notable SPAC-led transactions include the merger of Hippo with Reinvent Technology Partners Z with a company valuation of $5 billion, and the deal between CCC Information Services (a provider of data and technology services to the automotive industry) and Dragoneer Growth Opportunities, which was valued at almost $7 billion. The close of 2020 saw 248 SPAC deals raising the equivalent of £63.5 billion of proceeds in the US. You can read more about this here and here.
Although not currently prevalent in the UK, there has been a push by policymakers to loosen the regulatory burden on SPACs. The key regulatory hurdle to wide-scale adoption of the structure in the UK is the ‘trading suspension’ rule, which allows the FCA to suspend trading of the SPAC’s shares when the SPAC announces an intended acquisition target. This deters potential investors who are concerned that their exit from the company may be blocked indefinitely if the SPAC’s shares are suspended from trading. To further support this drive by the government, the FCA has launched a consultation with the aim of publishing a clear set of conditions under which the ‘trading suspension’ rule would not be engaged. There are several proposed criteria at this stage including ring fencing monies of public shareholders to either be applied for investment or returned to shareholders; and setting a minimum £200 million raise with the initial SPAC listing. You can access more information here.
Whether these government actions will result in the US-led frenzy filtering into the UK market is uncertain. The benefits of the structure are clear to see, but early pioneers of the strategy in the UK have had mixed results with Nat Wrothschild’s 2010 cash raise of £600 million into Bumi and its subsequent takeover of an Indonesian mining company, resulting in years of fines and governance woes. You can read more about this here.
Despite early challenges, recent SPAC activity, this side of the channel, is positive with Bill Ackerman launching a SPAC with the purpose of opening the likes of Reddit and Stripe to public investors, and Social Capital Hedosophia Holdings Corp V’s SPAC helping alternative lender SoFi go public.
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