Behind The Hype: Are SPACs A Good Route To Exit?

By Pierre Suhrcke

The popularity of special purpose acquisition companies, or SPACs, has exploded in the last year. While they have been around for many years, it is only in the last couple that their use has accelerated.

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According to one report, globally 200 SPACs raised $64 billion in 2020, just under the $67 billion raised by 194 initial public offerings in the same year.

SPACs and Europe

What about SPACs in Europe? To date, U.S.-based investors have led the way when it comes to SPAC deals, thanks in part to tighter investment regulations and fewer potential sponsors in Europe, but that doesn’t look like it will remain the case.

Ian Osborne, one of the pioneers of SPACs in the U.S., is reported to be planning to list a European-based shell company on the Euronext, joining the likes of ex-Credit Suisse CEO Tidjane Thiam and French billionaire Xavier Niel, both of whom recently launched SPACs.

Elsewhere, executives at a number of European exchanges, including Frankfurt, expect to see a surge in SPACs in the next couple of years.

SPAC activity in the U.K. has been hampered by listing rules that require trading in a listed company to be suspended when it announces an acquisition intention. However, this is currently under review as part of the Financial Conduct Authority’s consultation into SPACs, due to be completed in the summer of 2021.

Should the FCA amend the trading suspension rules, it could propel SPAC activity in the U.K. forward.

Why the hype?

But why is everyone going mad for SPACs?

First, these types of deals have opened up an alternative path to liquidity for investors and businesses that don’t want to go through a lengthy and costly IPO process.

The road to going public has always been challenging, but as a result of the pandemic the market for IPOs was temporarily derailed. Companies were nervous about going public as they were worried how market volatility might impact their listing, yet they still wanted to access liquidity. SPACs offer a faster, arguably less risky route to that goal for businesses and their investors.

Second, SPACs offer a route for investors to get involved in interesting, growing companies, outside of the formal IPO or series of funding events.

Third, a SPAC can be a straightforward way to make money for its investors, or sponsors. That’s because when the SPAC is first created, money from investors is held in trust, accruing interest. When the vehicle makes an acquisition, investors have a choice to convert their shares into stakes in the merged company, or recoup their original SPAC investment plus any accrued interest.

What’s the catch?

That said, just because there’s a lot of hype around SPACs at the moment doesn’t mean they’re necessarily the best way to exit right now. The boom in popularity could have a detrimental effect on the market, as we could see a lot of investment vehicles chasing a limited number of attractive businesses, driving prices up. If a company’s acquisition price becomes too inflated, the return to value for the SPAC becomes more drawn out.

There’s also the issue that, with SPACs already being listed businesses, the companies they acquire then end up being public as well. This isn’t a bad thing in and of itself, but it does mean that businesses need to have the right governance and processes in place, with the ability to report appropriately and all the other activities public companies have to do that private enterprises don’t.

Part of the benefit of going down the direct IPO route is the changes that need to be made internally. By contrast, the accelerated nature of a SPAC acquisition puts more pressure to make those operational and governance changes.

The increase in popularity has also meant an increase in regulatory scrutiny. While we have already seen how it could be that a relaxing of the rules helps accelerate the U.K.’s SPAC activity, in the U.S. the Securities and Exchange Commission is looking at a number of SPAC activities, including how they communicate with investors, and how shares are converted into stakes in the acquired company.  Depending on the outcome, some of the perceived benefits of SPACs may lose their appeal.

Are SPACs overblown?

Does that mean that SPACs are a bad option? Not necessarily.

As with any route to liquidity — whether funding round, IPO, secondary investment or acquisition — SPACs could be the right alternative for certain businesses.

Fundamentally, whatever the perceived benefits, the same principles apply, for both the business being acquired by the SPAC and by investors considering using such a vehicle: there needs to be a strategy, a clear vision on what success looks like, experienced management and alignment between investors and the company under consideration.

Our portfolio company Acorns is one such successful business choosing this route — it recently announced an intention to merge with SPAC Pioneer Merger Corp. for $2.2 billion, with the deal expected to close in the second half of 2021.

The deal is a good example of an ambitious, fast-growing scaleup partnering with a blank-check company backed by an experienced, knowledgeable management team including CEO Noah Kerner  and technology veterans including Uber co-founder Oscar Salazar, Lifelock co-founder Todd Davis and Mitchell Caplan, a former E-Trade CEO.

Considerations for investors

What else should those investors considering getting involved in a SPAC think about? At the end of the day, these are blind investments, so any investor needs to trust the team running the vehicle, interrogating their track record and making sure investment philosophies and approaches align.

Ultimately, there are certainly risks to SPACs, as there are with any investment. Anyone thinking about getting involved with a SPAC, whether as an investor or as a company being considered for an acquisition, should be clear on their reasons for moving forward.

Avoid the hype, look at all the available information, and make the decision based on what’s right for the company or investor in question.

Pierre Suhrcke is a venture partner at  TempoCap, a European technology investor in challenger brands that is based in Paris and London. Some firm investments include: Depop, Onfido, Azimo, Acorns and Talentsoft. Suhrcke has been on the board of more than 20 successful companies in the U.S. and Europe including RiskMetrics, Trema, and Adeptra.

Illustration: Dom Guzman;