SPAC to the future
Just when you thought no financial acronym could get any more air time then the omnipresent ESG, a new player has entered the fold: SPAC.
The term SPAC, or to write out the full name – special purpose acquisition company – shot to fame last year in the US thanks to the dramatic uptake as the vehicle of choice in taking companies public. This is despite SPACs not actually being a new construct. Far from it, in fact.
In contrast to an IPO and the accompanying prospectus outlining the business and investment case for a specific company, SPACs are listed shell companies that at the outset have no underlying assets (other than the money raised) and no commercial operations. Once listed and with capital at their disposal, SPACs acquire private businesses which then ultimately end up merging and becoming public companies.
In short, for businesses it’s an alternative route to public markets than the much more time-consuming, forensic and volatile IPO process. This swiftness and apparent greater ease is arguably beneficial for the businesses taken public via this method, but for investors backing the original SPAC it means they forgo the certainty of knowing what business they’ll end up as shareholders of.
However, SPACs are often sponsored by renowned institutional investors or high-profile individuals, which helps attract investment in and of itself – for instance, Virgin founder Richard Branson recently used a SPAC with a $480m war chest to take genetics testing company 23andMe public.
As has been the case with a number of finance and business trends in the past, the US led the way with SPACs in 2020.
However, in the first quarter of 2021, the amount raised via SPACs globally has already eclipsed last year totaling $79.4bn. In part, this is thanks to a greater showing of SPACs in Europe helping increase the overall numbers.
With the SPAC trend seemingly making the jump across the Atlantic to Europe, we are now seeing European financial centres jostling for SPAC supremacy, with many touting Amsterdam the natural destination of choice. London, trying to find its place in a post-Brexit shake-up, will undountedly be vying hard for its piece of the SPAC pie too.
Regulation will almost certainly play a part in where SPACs proliferate across Europe. However, while financiers and associated advisers in Amsterdam, Paris, Frankfurt and London will want to be at the forefront of the new capital-raising trend, equally their respective regulators won’t want to be at the forefront of a bursting bubble or substandard practices. No-one wants egg on their face.
For some the SPAC market looks frothy with short sellers already entering the fray. However, the current trajectory shows no sign of abating and continues to only go one way for the time being.
Either way, SPACs look sure to remain part of the financial lexicon and will continue to generate headlines and column inches that even ESG evangelists would be proud of.