Why the UK is joining the SPAC boom

When online used car deal­er Cazoo, the fastest UK firm to achieve uni­corn sta­tus, announced it would be going pub­lic on the New York Stock Exchange via a $7 bil­lion merg­er with a spe­cial pur­pose acqui­si­tion com­pa­ny (SPAC), the news was con­sid­ered a blow to the City of Lon­don. 

Cazoo isn’t the first UK com­pa­ny to snub Lon­don in favour of New York. Elec­tric vehi­cle firm Arrival announced it was going pub­lic via a SPAC last year and made its Nas­daq debut on March 25. Mean­while, diag­nos­tic test man­u­fac­tur­er Lumi­raDx is also set to float on the Nas­daq in a $5‑billion SPAC deal. 

The acronym SPAC has become syn­ony­mous with a frothy mar­ket. Essen­tial­ly, SPACs are a type of invest­ment vehi­cle, blank-cheque com­pa­nies that list on stock exchanges and then hunt for pri­vate­ly owned busi­ness­es to take pub­lic. For the tar­gets being acquired, it’s an eas­i­er process than going down the usu­al flota­tion route. 

There were 248 SPAC IPOs in Amer­i­ca in 2020, rais­ing a col­lec­tive $83.4 bil­lion. So far in 2021, there have already been 308, and count­ing, SPAC IPOs, which have raised $99.9 bil­lion. 

Such is the froth sur­round­ing SPACs, the US Secu­ri­ties and Exchange Com­mis­sion (SEC) is explor­ing options to crack down on the trend. Recent mar­ket jit­ters have seen some of the shine wear off and SPACs are no longer deliv­er­ing as high returns on deal announce­ments as they were at the start of the year. 

London lacks appeal

In stark con­trast, SPACs have yet to take off in the UK. The main rea­son for this is because of their struc­ture. 

“SPACs are struc­tured dif­fer­ent­ly in the Unit­ed States com­pared to the UK. With New York-list­ed SPACs, investors can redeem their shares if they’re unhap­py with the tar­get firm. That’s cur­rent­ly not the case in Lon­don, where trad­ing gets sus­pend­ed once a merg­er is announced,” explains Nass­er Kho­dri, head of cap­i­tal mar­kets at FIS.

This investor lock-up means the appeal of doing a SPAC deal in Lon­don is not as attrac­tive as it could be.

The major­i­ty of com­pa­nies that choose to go down the SPAC route oper­ate in indus­tries where they “need to move quick­ly to cap­i­talise on mar­ket oppor­tu­ni­ties”, accord­ing to James Allum, vice pres­i­dent and region­al Euro­pean head at Pay­oneer. The glob­al pay­ments provider is set to merge with a SPAC list­ed on the Nas­daq, chaired by bank­ing entre­pre­neur Bet­sy Cohen, in a $3.3‑billion deal.

Allum explains that, unlike the tra­di­tion­al flota­tion process, which only allows a com­pa­ny to share data on his­tor­i­cal per­for­mance, going pub­lic via a SPAC enables the com­pa­ny to share future rev­enue pro­jec­tions. 

To this end, SPACs can offer investors “an oppor­tu­ni­ty to share in the ben­e­fits of accel­er­at­ed growth”, he says. But if trad­ing gets sus­pend­ed once a tar­get has been announced, then it can weak­en inter­est in the com­pa­ny being acquired as poten­tial investors are tem­porar­i­ly pre­vent­ed from buy­ing shares. 

Despite con­cerns that the SPAC mar­ket in Amer­i­ca is show­ing the hall­marks of a bub­ble, Lon­don is active­ly look­ing at how it can relax its rules regard­ing blank-cheque com­pa­nies. In March, Lord Hill pub­lished a report on the cur­rent rules, in which he described the lock-in as “a key deter­rent for poten­tial investors”. 

Accord­ing to the report, there is “a real dan­ger the per­cep­tion that the UK is not a viable loca­tion to list a SPAC” could lead UK-based fast-grow­ing tech com­pa­nies to list on mar­kets in the Unit­ed States and Euro­pean Union. 

Lord Hill urged the Finan­cial Con­duct Author­i­ty (FCA) to con­duct a review into the rules to make list­ing in Lon­don more appeal­ing. A final deci­sion on any rule change is like­ly to be made towards the end of the year. 

Relaxed yet risky

So what might any changes look like? In layman’s terms, Kho­dri says we could expect to see the FCA pro­vide US-style pro­tec­tions, which means those investors unhap­py with a tar­get com­pa­ny can sell their posi­tion upon a merg­er announce­ment. 

“This is an improve­ment but, at the same time, doesn’t pro­tect retail investors from down­side risk,” he adds, refer­ring to the drop in a holding’s val­ue that can hap­pen between invest­ing in a SPAC pre-announce­ment and sell­ing post-announce­ment.

The risk asso­ci­at­ed with SPACs has been pre­scient in recent months. Like so-called “meme” stocks – think GameStop – US SPACs have become pop­u­lar with risk-hun­gry retail investors hop­ing for high returns on merg­er announce­ments. They may often invest with­out doing their due dili­gence and read­ing a SPAC’s IPO prospec­tus avail­able via the SEC’s web­site. 

Although invest­ing in SPACs can be risky, the ben­e­fits of relax­ing London’s rules could out­weigh any con­cerns. For one, it could help attract tech uni­corns that might oth­er­wise be lured else­where. It could also attract more impres­sive SPAC boards of direc­tors and ser­i­al SPAC spon­sors who have expe­ri­ence in the Unit­ed States tar­get­ing big-name com­pa­nies. 

Bruce Gar­row, co-head of cor­po­rate broking at Investec, believes the “rec­om­men­da­tions will cer­tain­ly encour­age the right man­age­ment teams with the right cre­den­tials to think seri­ous­ly about Lon­don”.

Of course, expe­ri­ence and past per­for­mance in doing SPAC deals is no guar­an­tee of future suc­cess. And there will be crit­ics in the City who believe that any rule shake-up would be bad news and Lon­don shouldn’t be jump­ing on the SPAC band­wag­on. How­ev­er, Kho­dri at FIS believes that if the rule changes go ahead, they’ll help boost London’s post-Brex­it pro­file.  

“It’s unlike­ly that Lon­don can catch up with Wall Street, but there’s def­i­nite­ly a place for the UK in the long-term devel­op­ment of this mar­ket,” he con­cludes.