SPAC Mania

For couple of months now, we can see on the market a boom of the famous “SPAC’s”. They are massively requesting a listing before making acquisitions of targets. It looks like they play it backwards, as usually the IPO is the ultimate stage. How to explain such a plebiscite? What are the risks of such a runaway?

 Alternative way to be listed

There is a mania for these Special Purpose Acquisition Companies (i.e., SPAC’s), which transformed capital markets last year. These blank-cheque companies raise money through a public listing with the promise of finding a lucrative investment target. Some stock-exchanges in Europe will certainly try to position themselves to embrace the SPAC revolution. London City faces competition with Amsterdam, for example. With public markets shrinking, the surge in listings offers a means of channeling large volumes of ready to growth capital into the economy. In addition, at the time when many asset managers are sitting on large sums of cash earning ultra-low interest rates, SPAC’s promise a higher return, theoretically without much extra-risks, at least in the pre-deal period. But the sheer number of SPAC’s has raised concerns they now constitute an asset bubble. We must confess that the structure of SPAC’s certainly needs to change for example not to be only open to sponsors but also to retail markets, on a transparent and fair way. A good example of SPAC is the recent TESLA rival LUCID (held by Saudi Arabia’s sovereign wealth fund and Churchill Capital IV) which broke a record (i.e., 24 USD bln).

 “Don’t pass the IPO space, go directly to the listing!”

Intended to list a company on the stock exchange without going through the IPO process, "blank-cheque companies", or SPAC, have been experiencing a meteoric rise in the USA since the beginning of last year. Despite in some cases a hint of scandal. This is an alternative route to the Stock Exchange that is tempting a growing number of candidates and investors. The phenomenon has experienced several waves since the 1980’s, but never in the current proportions. The cumulative amount of funds raised via SPAC’s amounts to several tens of billions of dollars. This is not without raising questions and criticism. A SPAC is a company with no operational activity that raises funds on the stock market with the sole objective of making one or more acquisitions (or a kind of PE investing in listed companies). An empty shell which is introduced upstream on the Stock Exchange based on succinct documentation - no activity or results to present - by asking investors for a sort of blank cheque. The only promise is to use the funds raised to acquire an unlisted company in return. Once the deal is closed, SPAC renames itself the name of the acquired company, which gets its hands on the funds raised, and that is it. What can convince investors to embark on such a transaction with their eyes closed is the reputation of SPAC's founders, often leading investors from the private equity world, who are financially interested in the entity's future success. It is typically an option to eventually acquire a fraction of the capital (often 20%) at a floor price. In summary, a SPAC has no commercial operations — it makes no products and does not sell anything. In fact, the SPAC’s only assets are typically the money raised in its own IPO, according to the SEC (or any other Supervisor). Usually a SPAC is created, or sponsored, by a team of institutional investors, Wall Street professionals from the world of private equity or hedge funds, while even high-profile CEO’s or billionaires have jumped on the trend and formed their own SPACs.

A quick(er) way to go public

In practice, SPAC’s are a bit of a colorful announcement indicating that they will be looking for targets in a particular area, for example health, transportation, or new technologies, such as MOU’s. For the acquired target, it is on the contrary an express way to go public, without having to go through the whole process to get the green light from the Securities & Exchange Commission (the SEC, the American stock exchange supervisor), and above all with greater certainty on its valuation and on the completion of the operation. In fact, the price is fixed by mutual agreement with the SPAC management, whereas during an IPO the valuation can be influenced until the last moment by market conditions - and it is not exceptional that a company must give up at the very last minute to enter a gust of wind, even temporary, shaking the indexes. By taking the SPAC route, a few weeks may be enough to reach an agreement and sign a deal. As a result, the exceptional volatility of the markets in 2020 undoubtedly contributed to the craze for SPAC. Studies have shown an acceleration in the number of SPAC’s introduced in 2020 and since the beginning of 2021. The numbers achieved have made 2020 a year out of the norm (more than three times the amount raised by SPAC’s the year before). This influx represents a windfall of commissions for the introducing banks. The most active are Credit Suisse and Citi. Goldman Sachs, a recent follower of SPAC’s (they have existed since the 1980’s but the bank had never touched them before 2016) is now in third place.

Difficult to assess risks

But there is food and drink in this growing cohort of blank-cheque companies, from Virgin Galactic to Playboy or more recently to Lucid. But critics point the finger at a form of market appeal that is somewhat blind, exposing underwriters to risks that are difficult to assess. The activity of companies that are being targeted by SPAC’s does not appear to be subject to the same degree of scrutiny as if they were required to meet the requirements of an IPO. The emblematic case is that of the start-up NIKOLA, which is at the origin of a concept of heavy-duty trailers with electric propulsion (either battery or fuel cell). NIKOLA - a name that refers to the Serbian-born American inventor Nikola Tesla, from whom Elon Musk had already drawn inspiration - has fallen by more than 70% since its peak, while its founder Trevor Milton has had to resign on suspicion of having misled investors about the reality of the company's technological advances. In France, the principle of SPAC is still very exceptional: the exception in question is MEDIAWAN, a company launched by Xavier Niel, Mathieu Pigasse and Pierre-Antoine Capton, which was introduced in 2016 after having raised 250 million euros with the aim of shopping in the media. A special purpose acquisition company is formed to raise money through an initial public offering to buy another company. At the time of their IPO’s, SPAC’s have no existing business operations or even stated targets for acquisition. Investors in SPAC’s can range from well-known private equity funds to the public (i.e., retail investors). SPAC’s have two years to complete an acquisition or they must return their funds to investors. Selling to a SPAC can be an attractive option for the owners of a smaller company, which are often private equity funds. First, selling to a SPAC can add up to 20% to the sale price compared to a typical private equity deal. Being acquired by a SPAC can also offer business owners what is essentially a faster IPO process under the guidance of an experienced partner, with less worry about the swings in broader market sentiment.

Furious madness or reasonable craze?

SPAC's are rushing to the stock market. The stock market is on fire and looks like raging madness. This frenzy is explained by the negative interest rates and the billions of dollars that the central banks have printed (i.e., QE measures). Current market conditions have not been seen since the year 2000. Three-quarters of this year's IPO's are SPAC's. This is cause for concern. In this ambient madness, the Amsterdam Stock Exchange seems to be playing its card intelligently, to the detriment of London (as consequence of the Brexit). We do not know what tomorrow will bring, but the trend is there and well underway and nothing seems to stop this high-speed train. As always, excess can harm and that is what we should fear.

François Masquelier, Chairman of ATEL  - March 2021