After rising explosively over the past two years, blank cheque companies have slowed down, as SEC noises and investor nerves weigh on deals. But in the US and Europe, the model of these blank cheque entities retains plenty of appeal, so wealth industry figures say.

Special purpose acquisition companies (SPACs) may have hit a downturn in the US in recent weeks amid regulatory rumblings, but they aren’t going away. And on the other side of the Atlantic, the market for these blank-cheque entities has plenty of potential, figures in the finance and wealth sector say.

US initial public offerings – important liquidity events that wealth managers track – surged in the first half of 2021 reaching $171 billion, beating the 2020 record of $168 billion (source: Dealogic). SPACs have fuelled some of this rise. SPACs are created with the purpose of merging with a private company within two years of the listing. There has been some cooling in the past few weeks, howeveer. 

In May, newly-appointed Securities and Exchange Commission chairman Gary Gensler said it was mulling fresh protections. He said the SEC is devoting significant resources to addressing emerging issues in a wave of traditional initial public offerings and SPACs.

WealthBriefing has been told by many figures in the wealth, legal and corporate finance space that the SEC’s position, and some concerns about the sheer pace of SPAC activity, has created a bit of a lull in the US.

“As the market begins to soften a bit you are going to have SPACs set up to engage in transactions where they have an incentive to find a target to acquire,” Jeremy Bressman, of law firm Kobre & Kim, said in a call.

“There may be a lot of SPACS that settle on targets that are not the best," he said. Bressman, who is based in Israel, represents clients in complex international and multi-jurisdictional disputes, including asset recovery, enforcement of judgments and arbitration awards, regulatory and criminal enforcement matters and cross-border investigations.

Late last week, reports (Techcrunch, others) said that the digital media outfit BuzzFeed had announced that it was listing via a SPAC. BuzzFeed also said that it will be purchasing Complex, another media company, for $300 million in cash and shares in BuzzFeed itself; the SPAC deal will help finance its purchase of Complex. In another case, one of the most visible SPAC players on Wall Street is hedge fund rainmaker Bill Ackman, of Pershing Square Capital Management. Reports last week said that his SPAC agreed to buy 10 per cent of Universal Music from Vivendi. 

A number of banks serving high net worth and family office clients are active in the space, such as Citi Private Bank (see this interview here). 

Keeping it simple
US law firm Katten surveyed 100 investment professionals in May, and found that they were positive about SPACs, even though there has been a slowdown. Some 72 per cent of investors working in private equity, venture capital, hedge funds and investment banks, who have participated in a SPAC transaction, thought that SPAC IPO activity would increase through 2022. SPAC transactions are more popular than traditional IPOs because they offer a simpler and more flexible process, Katten said.

"Investors expect that the conditions that have fuelled SPACs' growth over the last few years will continue to exist for the foreseeable future," Brian Hecht, a partner in Katten's New York office, said. "There will be some ups and downs along the way, including the relative slowdown in SPAC IPOs we're seeing now, for a variety of reasons, including some pullback from the stock market run-ups that SPACs had been experiencing, recent pronouncements from the Securities and Exchange Commission and perhaps just a perception that it's an appropriate time for the SPAC market to catch its breath after the frenetic activity in the first quarter. But it appears, more generally, that the momentum fueling the SPAC market is sustainable."

Katten said the industry thinks that SPACs offer a simpler process than standard IPOs. SPAC issuers have additional flexibility with certain disclosures in SPAC transactions compared with traditional IPOs, creating free space for SPAC target companies to tell their stories to investors - an advantage that 74 per cent of respondents cite for SPAC deals. That can be especially advantageous for early-stage companies in industries such as technology and life sciences, which often do not yet have the established financial track records that IPO investors typically look for.
 

Europe
It’s often the case that hot investment trends in Wall Street soon show up in Europe. 

“There is more demand and more appetite,” Alasdair Steele, head of ECM in London at global law firm CMS, told this publication. The firm is seeing demand from the brokerage world from retail/private clients to invest in SPACs, IPOs and public market fundraisings more generally, he continued. 

The UK regulatory regime is likely to catch up with that in the US, Steele said. A number of SPACs are being launched/waiting to be launched in Amsterdam, with a number waiting to see whether the UK regulatory position will be re-aligned with the US and Amsterdam so that they can launch in London.

SPACs have been around in one form or another in the UK and continental Europe since the early 2000s. In Europe and the UK they are also called cash shells. 

In the UK, under existing listing and company rules, a listed entity (like a SPAC) needs shareholder approval for a rights issue if it wants to raise more capital. If an investor ultimately does not like the SPAC acquisition, in the US (and some other European markets) there is a right for the investor to be repaid most, if not all, their investment. In addition, investors would be able to sell their shares on the market, Steele explained.

“In the UK, there is no right to a return of your investment if you do not like the de-SPAC acquisition and current listing rules result in the SPAC shares being suspended until the prospectus (ie full documentation) has been published in relation to the de-SPAC acquisition, so investors are unable to sell their SPAC shares in that period,” he said. 

The four largest SPAC IPOs in the UK (J2 Acquisition, Landscape Acquisition Holdings, Ocelot Partners and Wilmcote Holdings) represented 99.1 per cent of total funds raised by UK SPACs in 2017.  SPACs suffered after the Nat Rothschild-backed SPAC bought Indonesian miner Bumi and it all went sour over what Bumi did and did not own, Steele said. (Nat Rothschild raised money to float a cash shell to buy up mining assets in developing economies. Rothschild created the London-listed Bumi PLC, which had acquired a stake in the Bakries' business.)

Steele addressed the argument that SPACs might disintermediate some forms of private equity.

“Private equity firms bring oversight and other investment skills that a SPAC investor/sponsor might not have”, he said. 

When a PE fund buys a business, the seller gets the cash straight away, Steele said. With an IPO as an exit, the sellers rarely get all their cash out immediately and there is no guarantee that the IPO will be successful (either at all or at a price that is acceptable) until the very end of the process. A SPAC is seen to “de-risk” the fundraising because the SPAC has already raised the cash and therefore is more similar to the position of a private equity fund which also has immediately available cash, he said. 

Be vigilant
Kobre & Kim’s Bressman said that those involved in SPACs must be prepared for the possibility of litigation and should make sure that they have the evidence needed to show that they took all necessary steps to deploy capital with as much diligence as possible.

“We [also] represented executives of an intelligence communications company who were subject to civil lawsuits and regulatory enforcement actions related to claims that they defrauded shareholders of a US SPAC in an effort to merge it with their company. For instance, we recently represented a non-US startup in a contractual dispute with a lender who was going public via a SPAC transaction,” Bressman said. 

Despite such problems, wealth industry figures remain broadly positive. 

SPACs have to some extent been a beneficiary of the valuation gap between private and public listed markets. In the US, public markets have been trading on average around 20 times earnings; with private markets, it is around 11 times, Jack Ablin, chief investment officer at Cresset Capital, told FWR. SPACs are “great exits for private investors,” Ablin said. “It is a great potential opportunity for private companies that want to go public.”

The type of investors interested in SPACs will vary depending on whether they are in the private or public market sides of the equation, he noted. Some investors will be interested in the finance-raising side and of getting involved in the share opportunities linked to IPOs.

“It is obviously in the sponsor’s best interests for trading after an IPO to go well,” Ablin said. With conventional IPOs, the area is highly regulated and complex, and relatively expensive, he said. “Once a SPAC is established, taking a private company public is much faster and less regulated.”

Talking point
The SPACs story has become a wealth sector talking point. The winning formula for SPACs, so advocates say, is that buyers have a 20 per cent stake in the financing vehicle at a low cost, which turns into a big stake in the target company after a merger. Sellers can go public without the hassles and restrictions of a traditional IPO. 

One consideration to bear in mind is whether a rule change will affect the SPAC drive, such as a scheduled adjustment to the New York Stock Exchange’s direct listing rules. The new rule, approved by the Securities and Exchange Commission in late December 2020, will allow companies to raise fresh capital through direct listings as opposed to just selling existing shares. Under the change, companies can raise cash from retail investors as well as by selling existing shares of the company. Commentators have said this might reduce demand for a SPAC or traditional IPOs.

“It is undisputable that the US led the recent SPAC boom, with Europe on its heels. Indeed there were $166 billion in SPAC deals announced in the first quarter of 2021 alone," Bart Deconinck, executive chairman at ZEDRA, said in a note. “While high-profile institutional investment houses and private equity firms were key to the expansion of SPACs in the US, conversely family offices and entrepreneurs were at the heart of Europe’s uptake. This may be attributed to a number of factors, not least the incredible connections, knowledge, investment capabilities and flexibility of family offices’ executives and structures, looking at doing bigger deals with other like-minded investors.”

“Despite family office involvement still being seen in smaller numbers than hedge funds and institutional investors, it is growing and we are now seeing greater interest in the US, following in the footsteps of its European counterpart, able to compete against the big private equity houses,” Deconinck said. 

In April, the Securities and Exchange Commission issued guidance that SPACs would need to classify their warrants as liabilities instead of equity instruments.