Will UK SPACs takeoff in 2022?

What is a SPAC?

A SPAC is a Special Purpose Acquisition Company. These are cash shells that have no commercial operations or investments that raise money from investors and list on a stock exchange before using those funds to buy a private business to take it public.

Where next for the US SPAC market?

SPAC listings in the US have hit record levels in the last couple of years, with 248 going public in 2020 and 630 joining them in 2021. Not only has the number of SPACs increased markedly, but the amount of money being raised and the size of the targets in their crosshairs has also grown significantly.

There are currently 679 SPACs at various stages of development listed in the US, according to Stock Market MBA. But only 92 of these are currently in the process of completing a deal to take a private company public, with the other 587 still searching for a suitable target.

That is significant. This means US SPACs are expected to find 587 suitable businesses to the market within the next 24 months. That is a big ask considering that there have been fewer than 475 IPOs, which is seen as the traditional way for a company to go public, every year in the US apart from 2021 (when IPOs also hit a record high). This means SPACs will find it increasingly difficult to find a target that it can buy within the required timeframe, and is likely to lead to either a drop in the quality of businesses being bought or a rise in the number that fail and have to return cash to shareholders.

The SPAC market has seen something of a slowdown since last year, when US regulators started talking about tightening rules on the market after SPACs raised over $100 billion from investors. That was the result of growing criticism over how SPACs can favour their sponsors and early investors over those that invest when the SPAC lists.

Are UK SPACs set to take off in 2022?

While the SPAC market in the US roars continues to roar ahead, regulators elsewhere around the world have not embraced them in the same way and remain more cautious toward them. A more favourable regulatory environment in the US is one of the reasons it has attracted most of the listings over the last couple of years.

SPACs have listed in London for decades. Indeed, they were a popular way for the rush of companies aiming to capitalise in the frenzy for tech stocks in the dot-com era (partly explaining why some still regard them to have a bad reputation) and around $2 billion has been raised by them in London since 2017 alone, according to Norton Rose Fulbright. Still, that remains tiny considering US SPACs raised a staggering $137 billion in 2021 alone.

But the UK Financial Conduct Authority introduced new rules in August 2021, when it made several changes to the listing rules in order to accommodate the unique nature of SPACs. However, they are still regarded as more stringent compared to the US and other markets, and there is a debate about whether they will provide a realistic framework for SPACs to thrive in. The FCA, despite giving SPACs the green light, continues to warn that they are a ‘more complex instrument’ for investors, which need to tread carefully ‘regardless of whether a SPAC has structured itself to comply with our new rules and guidance’.

The new rules around reverse takeovers are designed to enhance protections for shareholders and make London a more competitive location in a growing market, particularly as competition with Europe intensifies post-Brexit. Amsterdam is currently the number one location for blank-cheque companies in Europe, partly thanks to the fact there are no minimum fundraising amounts, but London is hoping to leverage its strengths to attract more business away from the continent, while also encouraging British businesses to list at home rather than going elsewhere. This is especially true of tech stocks that tend to prefer to list in the US, with the latest SPACs preparing to launch in London predominantly eyeing tech targets.

What are the rules for UK SPACs?

The biggest barrier to SPACs in the UK was the rule that required shares to be suspended between a deal to buy a target company being announced and completed, which has now been removed. This is the single most significant change that has effectively opened up the UK SPAC market.

Still, there are other requirements. A new SPAC must raise at least £100 million from investors in order to list, with the regulator having halved that from its original minimum of £200 million over fears the bar was set too high.

The money raised from investors must be ringfenced and they have the right to exit the SPAC and recoup their investment at any time before the acquisition with the target company is complete. Shareholders have to approve any proposed deal, which must be completed within 24 months of the SPAC listing (although investors can be asked to agree to a an extension of a further 12 months).

It is worth noting that some SPACs that bit the bullet and listed before the latest rule changes, which mostly listed on AIM and raised much smaller sums from investors than what is on the table now, have struggled to complete deals. Rockpool Acquisitions went public back in 2017 with the goal of buying a company in Northern Ireland but is still searching for a target today. Meanwhile, UK SPAC, which converted to a cash shell in February 2021 and was previously Mountfield Group, had to delist from AIM in February after taking too long to complete its deal to buy Hellenic Dynamics, forcing it to switch to a trading platform for private companies.

Top UK SPACs: how many UK SPACs are there?

Although some had predicted a boom in SPAC listings following the rule changes last year, it has so far remained muted with only a handful of listing announcements so far.

The first one to go live since the changes were introduced was launched by international investment firm Hambro Perks, which is raising up to £150 million in order to bring ‘a European tech champion to the public market’ at a valuation of above £800 million.

Since then, we have seen a few more trickle through. This includes Hiro Metaverse Acquisitions that is looking to raise up to £115 million to buy a target within the sectors of ‘video games, esports, interactive streaming, GenZ social networks, connected fitness & wellness and metaverse technologies’ at a valuation north of £450 million.

Although the number of SPACs to have announced plans to list in 2022 has been underwhelming, the sums of money being raised by the first-movers are significantly higher than what most have raised up until this point – and they are targeting valuations large enough to snag a target that can grab the attention of the markets.

While more SPACs are poised to launch in London this year, it is worth noting that times have been tough for new entrants in general over the past couple of years with many major listings, from The Hut Group to Deliveroo, having lost significant value since going public, painting an uncertain picture for UK listings in general this year. The growing uncertainty lingering over the global economic recovery from the pandemic amid rising inflation, supply chain disruption and the escalation of the Russia-Ukraine crisis, could also cause some SPACs to pause for thought and wait for more ideal conditions to either list or pursue a target.