Spotlight on Spacs: UK hopes slow and steady wins the race

Amy-Jo Crowley, Charlie Taylor-Kroll, Sofia Cerqueira
20 September 2021

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Exuberance at the prospect of an incoming wave of special-purpose acquisition company (Spac) listings in the UK following August's rule change may be premature, but not necessarily irrational.

Any boom due to follow the Financial Conduct Authority's rule changes in August – intended to lure Spac activity to the London Stock Exchange (LSE) – has not yet materialised, as investors digest the US-dominated mammoth Spac issuance of USD 131.6bn seen in 2021 so far. Of this, only USD 6.8bn's worth of Spac issuance has taken place on European exchanges, Dealogic data shows.

The more flexible regulatory framework means UK-listed Spacs no longer have to suspend trading when a business combination is announced. Market conditions allowing, the review gives the LSE a chance to compete with European jurisdictions such as Amsterdam, which have struggled to process a flurry of potential deals.

Indeed, an adviser says that although "a couple" of blank-cheque vehicles are in the works to launch later this month or October, he expects a lower volume of activity due to "tricky" markets.

After the Spac glut, investors are more selective about allocating capital and are waiting for de-Spac transactions to occur before renewing their appetite in the investment vehicle, another adviser said. Higher interest rates and investors' growing preference for public stock/IPOs is another dampener. Most of his clients have put their plans on hold.

Charlie Walker, LSE's head of equity and fixed income primary markets, agrees that a more "sustainable volume" of activity is expected. "There are a growing number of Spacs applying to come to the UK market; how many are successful will clearly partly depend upon market conditions," he says.

Who wins then? Successful issuers will be those with strong promoter groups and who can show pre-committed capital of about 30-50% upfront, market players say.

Rather than celebrities, sponsors driving the activity are CEOs teaming up with a former bankers or private equity players. Mid-market private equity firms are looking to take a slice of the activity as an alternative way to raise capital, we hear. There is also a trend of issuers with a US track record now seeking to launch a UK listed vehicle to target European companies, Walker notes.

The challenge for UK Spacs is compounded by those already on the market looking for a deal. "There will be more selectivity in scouting for targets and there will be a scarcity value, which will push valuations up," a third adviser said. According to Dealogic, 477 vehicles have yet to agree a merger with a private company.

Spacs will likely target niche sub-sectors of technology such as renewables, fintech, retail, and natural resources, advisers agree. Targets are still likely to be pre-revenue, where there is more uncertainty around the equity story, instead of dividend-paying businesses with a straightforward equity story.

As the coveted list shrinks, party latecomers may struggle to enter the room, let alone find a dance partner.

Spotlight on Spacs EMEA is a monthly column that tracks the latest news, data, and analysis on special purpose acquisition companies, drawing on proprietary intelligence from Mergermarket and Dealreporter, as well as data from Dealogic.