SPAC is the acronym on everybody’s lips recently, but what does it mean and can we expect SPAC mania to reach the UK?
In the past year, SPACs have been one of the buzziest trends for US investors but are only tentatively growing in traction in the UK and Europe. Will they catch on?
Unbeknownst to most, SPACs have actually been around for a lot longer than might expect. SPACs in their current form officially listed in America all the way back in 2003 and the first one to hit European shores did so in 2005.
Some of the biggest companies in the world have listed through SPACs, including Burger King which went public for the second time in 2012 thanks to a SPAC run by famed investor and hedge fund manager Bill Ackman.
Following the Reddit vs Wall Street saga that came to a climax earlier on this year, it’s no wonder that investors are treading carefully around the latest craze and given how popular SPACs have become in the States, it begs the question, will SPAC mania hit the UK?
First things first, a special-purpose acquisition company or SPAC is a way for companies to go public without going through all the hassle and expense of an IPO (initial public offering).
Instead of directly listing on a stock exchange, companies will merge with a shell company that has been set up for the sole purpose of raising funds, listing on a stock exchange and then using the cash raised to acquire another company.
As SPACs only exist for the sole purpose of completing deals, they are also often referred to as a ‘blank cheque company’.
Now, I know some of you might be asking what is the point of this?
Well, it helps companies that don’t want to undertake a direct listing to still become a publicly-traded company, which in turn helps to raise fresh capital.
Linda Main, head of capital markets advisory at KPMG UK, said: “However controversial, SPACs are providing an alternative mechanism for companies to access the public markets. The changes proposed are positive because they seek to put London on a level footing with other global financial hubs, principally New York.”
“That said, there’s an element of “buyer beware” here. The people behind SPACs usually enjoy very good returns. It’s contingent on investors to take this into account when deciding whether to participate.”
If you needed any indication of just how profitable SPACs have become, in 2020 SPACs raised a total of $79.3bn, but, as of earlier this week, SPACs have raised $79.4bn in 2021 so far alone, according to new data from Refinitiv.
All SPACs start out their life as a collection of units worth say $10 a piece, and then once the fund starts to gain traction, the value can go up or down like a regular stock.
Often when companies undergo an IPO, the cost of shares in the company will balloon before eventually bursting and falling to a much lower price. SPACs on the other hand tend to hold value for much longer.
David Kimberly, an analyst at trading and investment platform Freetrade, told AltFi: “Lots of investors love SPACs because it offers an opportunity to dodge the often eye-watering difference between a stock’s IPO value and the price at which it starts trading on an exchange.”
“Investors already own the stock before an acquisition is complete, so they stand to benefit from any subsequent pop in price. The obvious danger here is that you don’t know exactly what you’re buying into, meaning you could get hit hard if the SPAC ends up making a bad investment.”
By all accounts, it already has started to hit these shores, at least in terms of popularity among investors
A spokesperson for Freetrade told AltFi that, over the past few months, SPACs have massively grown in terms of popularity, with many featuring as a top bought stock of the week for several weeks in recent months.
With some of the most popular being Bill Ackman’s, the manager of hedge fund Pershing Square’s which has launched a SPAC tipped to take the likes of social networking site Reddit and payment infrastructure fintech Stripe public, and Social Capital Hedosophia Holdings V, the SPAC helping alternative lender SoFi go public.
As more UK-based investors turn their attention to SPACs, we also see regulatory bodies look to relax regulation to encourage the SPAC boom to reach the UK. Is this a good thing?
Karim Haji, head of financial services at KPMG UK, said: “Relaxing the rules on dual-class shares and the minimum level of free float are about providing entrepreneurs and investors with more flexibility and the incentive to raise and invest their capital here in the UK, which in turn helps the economy.”
“When successful UK companies feel it is more beneficial to list in New York or elsewhere, it is very logical to consider how we can ensure London remains a world-class financial market that attracts the best businesses.”
A key question is whether companies will favour the trend, instead of looking at traditional IPOs or direct listings.
In the Kalifa review, published earlier on this year, it was noted that most successful companies choose to list over in the US, with 53.3 per cent of all listings taking place on either the New York Stock Exchange or NASDAQ, compared to just 6.7 per cent on the London Stock Exchange.
The fintech is to merge with a FinTech Acquisition Corp. V (FinTech V), a publically-traded SPAC run by American businesswoman Betsy Cohen.
With proposals such as changing the way companies list, bringing the LSE more in line with its American counterparts, regulators are encouraging companies to list here in the UK and not across the pond.
In light of encouraging this kind of activity and given that SPACs are some of the most popular stocks traded by amateur investors here in the UK, it’s safe to say this is a craze that could be due for a new lease of life on this side of the Atlantic.