Will reforms in the UK galvanise a SPAC market into the kind of rapid growth that has been witnessed in the US?

This news service has reported and commented on the phenomenon of blank-cheque companies, aka special purposes acquisition companies, SPACs. (See an example here.) These entities, which are raised to make acquisitions, have boomed in the US before cooling somewhat in recent weeks as US regulators hinted at reforms. On the European side, the market is far smaller, but with a few players in the field. What are the prospects for a SPAC boom in London? 

To address this question is Cliff Pearce, global head of capital markets at Intertrust Group. The editors are pleased to share these views; the usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

Despite frustration over the SPAC backlog, the end result could be beneficial for institutional and retail investors alike.

The attraction of special purpose acquisition company (SPAC) transactions is swift completion. At three to six months, the process compares favourably with that of their longer established cousin, the IPO, which averages between six and nine months.

Now, however, greater regulatory scrutiny has led to a backlog of SPACs in the US. In the UK, Europe and Asia, a similar picture is emerging, largely for the same reasons. 

Regulators in these jurisdictions are running a fine-tooth comb through proposals, looking for apparently over-inflated SPAC projections (which IPOs avoid), “unqualified” sponsors (such as celebrities) and warrants reclassified as liabilities rather than as equity (warrants are usually the deal sweetener). 

For some regulators - the Netherlands’ AFM, for example - it is a matter of taking the heat out of the market to ensure that they have adequate bandwidth. SPAC bottleneck: can an IPO outpace a SPAC in 2021?

If you are a SPAC sponsor at the back of the exchange queue, all this might have you wondering whether the IPO route would be quicker than a delayed SPAC.

More IPOs were listed on the London Stock Exchange (LSE) in the first quarter of 2021 - 21 of them – than in any quarter since early 2018, according to Statista. In the same period just three SPAC IPOs were completed in the UK capital. 

There is frustration over delays, but some SPAC sponsors admit that the greater scrutiny may not be a bad thing. Chamath Palihapitiya, the Sri Lankan-North American billionaire investor dubbed the “Pied Piper of SPACs,” is among them. He has called for more oversight and regulation when it comes to his investment vehicle of choice. 

“It is time to improve the regulations around the SPAC ecosystem with clear and rigorously enforced standards to push for high deal quality and appropriate investor protections,” he wrote in a recent Bloomberg article.”

National security on LSE’s SPAC agenda
Sponsors wishing to list on the LSE have seen delays as checks are increased for companies that may be tied to “dirty money” or hostile foreign states. 

SPACs in the UK are already being held in a queue while sponsors wait for recommendations from the government-commissioned Hill Review. Some have also been diverted from the Netherlands as the Dutch regulator is limiting new issuances this year due to record-breaking trading activity over the past 12 months. 

This latest national security concern could add yet another layer of uncertainty over reporting requirements.

Listing matters have hitherto been the responsibility of the UK Listing Authority, part of a regulatory body of the Financial Conduct Authority (FCA). However, moves by the UK Parliament’s Foreign Affairs Committee could see the National Security Council become involved.

MPs are concerned that the FCA’s role is too narrow to combat stealth influence by hostile foreign states on UK and multilateral organisations. They believe that the body’s powers should be combined with a far broader assessment of national security considerations, according to a recent report.

Dealing with unknowns is always difficult; but the banks underwriting a SPAC may be able to assess the prospective counterparties more thoroughly. And if they were to raise questions, administrators such as Intertrust Group would certainly act accordingly. 

Is the SPAC queue moving?
These delays are likely to last for a good part of the summer, given the latest accounting considerations on warrants and projections. However, after a bottleneck in April and May, the queue is now moving as US SPAC teams, their lawyers and accountants have sorted matters out, according to a June Law360 report. This hold-up will not materially impact the SPAC market in the grand scheme of things. Indeed, a market pause could improve structures, protecting institutional and retail investors alike. 

SPAC listing rules: getting them right the first time
The UK government and the FCA will want to get listing rules right the first time. London clearly wants a very prosperous exchange. And new capacity will be particularly welcome in the wake of Brexit. 

The LSE will therefore want to promote a sustainable market that gives retail investors rare access to IPOs that were traditionally unavailable to them. A lot of positives could come from reconditioning the SPAC market in its infancy; one of them being its long-term sustainable growth.