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SPACs Lose Momentum, But Here To Stay - Industry

Tom Burroughes

28 June 2021

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 , 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 , 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 , 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.