The liberalisation of rules concerning special purpose acquisition companies (SPACs) in the UK market is set to boost the country’s competitiveness as a financial centre, but the proliferation of “blank cheque” vehicles so far in 2021 spells heightened risk for investors and could indicate bubble territory.
Professional investors broadly welcomed Lord Hill’s 3 March Listing Review recommendations, which included liberalising listing rules for SPACs, with expectations that the changes would help to grow the number of listed equity opportunities available in the UK.
CEO and founder of Aquis Exchange Alasdair Haynes said SPACs “represent an exciting new opportunity for the UK market”, with the firm welcoming them onto the Access segment of its growth market.
The full-year annual record of 256 SPAC IPOs set in 2020 has already been surpassed this year, with 258 launched by 11 March, of which 250 were in the US, according to Refinitiv research.
Portfolio manager at IG Sam Dickens said the surge in SPAC activity in the US indicates that “the demand for UK-listed SPACs would be high”
While the encouragement of SPACs listings in the UK “makes sense from a competitive perspective for the London Stock Exchange and for London as a global financial centre,” CIO of J. Stern & Co Chris Rossbach warned that investors should be “extremely cautious”.
Explaining that J. Stern has not, and would not, invest in a SPAC, Rossbach noted the growing trend of investors looking to private markets as a means of bolstering returns and taking advantage of a “valuation arbitrage” between private and public equity markets.
“There is a risk/reward for everything, but the incremental risk that you have to take in terms of illiquidity and disclosure, and potentially governance and alignment of interest, from investing in a private company, compared to a public one, is very significant,” he said. “Investors should be able to assess the fundamentals of what they are going to invest in. Investing in a SPAC, no matter what the track record of the people sponsoring it, as a vehicle to take advantage of this arbitrage in perceived values between public and private markets – it is very unclear if that is sustainable.”
Leap of faith
Richard Staveley, portfolio manager at Gresham House Asset Management, described SPACs as “a form of regulatory side-stepping with much less onerous scrutiny than comes with a normal IPO”. “When animal spirits are high, scrutiny levels often drop as the herd chase returns,” he explained. “In essence, those forming SPACs are leveraging personal reputations to attract ‘blind’ investment capital.” When investing in a SPAC, particularly pre-deal when it is yet to identify an acquisition
target, investors are essentially required to take a leap of faith in backing the individuals behind respective vehicles. Based on Refinitiv analysis of IPOs priced since 2018, approximately 500 SPACs are currently searching for a business combination.
“While the quality of ‘people’ is critical to any investment, it is usually the business fundamentals and the valuation paid for it that drives the return outcome,” said Staveley. “Some of those reputations will be deserved and the SPAC will buy a great business for an attractive valuation, however many will misstep.