News & analysis RETURN OF THE SPACS
Does a flurry of special purpose acquisition companies to hit the market mean that spacs are back? Andrew Holt takes a look.
There has been a rapid splurge of new special purpose acqui- sition companies (spacs) listing in the US – which raises questions about whether they are back in vogue as an invest- ment vehicle. Heading the field has been climate tech startup LanzaTech, which appeals to environmentally conscious investors in that it is a conduit to the energy transition. It listed on Nasdaq in February.
This followed car-sharing company Getaround, which com- pleted its spac offering before Christmas. Then there has been insurance tech firm Roadzen, which is set for a Nasdaq listing via a spac merger, and British IT firm Noventiq head- ing to New York. Such activity suggests that a trend is forming. Expectations that the Fed is nearing the end of its rate raising has been cited for a boom in the stock market during January and February, which in turn could also be spurring on the spac splurge.
New York, New York Two inter-related points stand out: will London ever follow New York in being a leading staging post for spacs? And sec- ondly, how attractive are spacs to investors? On the first point, in the race to attract more of these invest- ment vehicles, the London Stock Exchange adjusted its rules in 2021 to open the door to such entities. This was part of then chancellor Rishi Sunak’s post Brexit plan to attract capital to the City. But his hopes for a flood of spacs rushing through the exchange’s doors has been more of trickle.
It could be that spacs are just a fad, driven primarily by the Sil- icon Valley trend, as they are usually tech related listings. But such a view has been questioned by the London Stock Exchange, which believes European investors are just as hun- gry for data on spacs as their US counterparts. But reality could bite, based on one interpretation of the num- bers. Europe’s spac market lost 78% of its value during 2022. Not a good number. But that was a fall from record levels of issuance during 2021, according to financial-focused law firm White & Case. With issuance for 2022 totaling $1.90bn (£1.5bn), compared to $8.61bn (£7.1bn) in 2021 – these numbers should be put in con- text, and attributable to negative factors that contributed to the overall market: sustained levels of high inflation, interest rate hikes by central banks and geopolitical pressures.
6 | portfolio institutional | March 2023 | Issue 121 Europe strikes back
An interesting picture appears when breaking this down by European exchanges. London emerged as the most engaged market for spacs in Europe, with four listings securing issu- ances totaling $935m (£780m). This marks a significant improvement on the previous year, when only one spac raised $390bn (£325bn) on the UK bourse. The Netherlands – the leading European exchange for spacs last year – recorded two such IPOs raising a combined $451m (£376.4m). This compares to an impressive 15 listings with proceeds of $4bn (£3.3bn) in Amsterdam during 2021. Germany ranked third with two spacs raising a total of $363m (£302.9m) in 2022.
In the wider picture, these numbers are pretty decent in what was a pretty tough investor environment.
If such a premise is accepted, it does present a picture in which Europe could challenge the US spac space. Although not yet. But this is the trajectory of travel as European stock exchanges have proven their ability to deliver flexibility and liquidity for spacs. There is no doubt that the awareness of the spac model has increased in Europe in the past two years, with spac struc- tures becoming established as a mainstream route to a listing. Another factor driving more listings in Europe and London is the US taking a tougher regulatory stance on spacs.
Wheat from the chaff This shifts the emphasis back to investors, with the key point being: are spacs attractive to investors? Spacs can boast greater speed, flexibility and price certainty when compared to other IPOs.
There is nonetheless a casino investment problem to spacs. Backing the right spac can lead to eye watering returns – the most successful seeing north of 30%. These though are the exception, not the rule. Finding the wheat amongst the chaff in the spac world can be a perilous business. That said, even liquidated spacs – when returning cash to investors when a deal cannot be made – can return 2%, according to the University of Florida. Not to be sniffed at in a market where returns can be in the negative. This poses a different question in terms of whether enough spacs, particularly in London, can fulfill investor demand. The situation, as it stands, is most definitely a no. Which suggests a potential opportunity for spacs to exploit growing investment trends. Here, new spacs focusing on green issues point to a clear slighted future. One in which spacs are not just back, but potentially even better. That said, it is not all good news. LanzaTech’s listing, at least so far, has gone the way of many spacs. In its first weeks the shares plummeted more than 40%. Proving that in the world of spacs, nothing is straightforward.
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