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London markets need radical reform to catch the rising tide of SPAC deals

25 March 2021

Cliff Pearce

Global Head of Capital Markets, Group

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Cliff Pearce

Global Head of Capital Markets, Group

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Nasdaq will repeat its 2020 SPAC listings win unless the LSE comes up with more attractive and flexible propositions to attract deals.

After just three months, flotations of SPACs (special purpose acquisition companies) on US markets have raised $89.7bn in 2021. This overtakes the $83.4bn raised throughout 2020, according to industry tracker SPAC Research.

And over the past year SPACs have outgrown traditional initial public offerings (IPOs) by $29.5bn, according to data from IPOScoop.

So now European exchanges, including London, are keen to get in on the action. And with domestic US SPAC deals close to saturation point, there are already signs that US SPAC teams now have European assets on their radar. We discuss this in a recent Intertrust Group Insights report.

So how can the Europeans compete with the Nasdaq and bring a share of deals back home?

SPAC worries rise in the US

In the US, high-profile SPAC stories have led others to jump on the bandwagon, creating a deluge of deals. Yet if market volatility wipes out gains for these vehicles before they even name a target and have a chance to prove themselves, we risk quickly ending up with no market at all.

This “frothy” scenario is one David Schwimmer, CEO of the London Stock Exchange (LSE), wants to avoid, he said in an interview with CNBC’s Squawk Box Europe. Meanwhile, David Solomon, Goldman Sachs CEO, told CNBC in January that the market would “naturally flush some of this excess”.

Other concerns are also rising in the US. Many SPACs are trading at a premium to their cash holdings. For example, Churchill Capital Corp IV was reportedly trading as high as $65 before anyone saw the terms of its tie-up with Lucid Motors Inc. Its shares have since fallen more than 60%. Such stories are attracting the attention of the US Securities and Exchange Commission (SEC).

The regulator is already investigating completed de-SPAC transactions (the process after a target has been identified) where short-sellers have identified allegedly misleading disclosures. One recent case of questionable transparency was highlighted in a Hindenburg Research report on Lordstown Motors SPAC.

How to bring the SPAC boom to London

The LSE should be all over the SPAC deal opportunity. But it’s not. Xavier Rolet, LSE’s former CEO, said as much in a joint letter with other members of Shore Capital (where he sits on the board) addressing Jonathan Hill’s comprehensive post-Brexit review of the UK’s capital markets.

Only four SPACs were listed in the UK last year amounting to just $0.03bn. Like Hill, Rolet believes the added flexibility and proportionality of the UK’s regulatory system will support growth and innovation of UK technology companies, while also enabling the LSE to compete as a global marketplace.

Rolet also believes the UK’s Listing Rules, authorised by the Financial Conduct Authority (FCA), need a regulatory and fiscal recalibration to compete with the US. Implementing this could help to realise London’s full SPAC potential and spur substantial scale-up equity capital. Institutional investors and analysts would also need technology sector training to value SPAC opportunities on a level with their US counterparts.

Permitting the disclosure of forward statements as part of private investments in public equity (PIPE) could also attract trade to London, instead of New York or Amsterdam, Rolet suggests.

The FCA rule that suspends trading in a SPAC’s shares on the LSE once a target is acquired is the marketplace’s stickiest point because investors can feel trapped if they do not approve of the acquisition. Other markets are adapting quickly to this challenge. For example, on 1 February Nasdaq Nordic introduced a framework for SPACs that allows shares to be traded after an acquisition is announced, so investors can sell if they do not approve.

Greater protection for investors

If LSE suspension policies are not changed, less savvy retail investors who invest early on could unknowingly be subsidising PIPE investors that come in later, diluting shares in the process. Institutional PIPE investors could also exert undue influence on the original SPAC agenda.

On the topic of greater protections, we would expect SPAC teams and founders in the UK to demand dual-class shares to give them greater control over their businesses, especially in times of market volatility.

If the LSE can provide this, along with greater guidance for retail investors (namely on true cost fees to share price and the importance of time-sensitive deal voting rights), then UK regulators may feel able to act swiftly and confidently on reforms.

Until the LSE moves to a more US-style SPAC structure – but with even better features such as favourable jurisdiction-led tax incentives, free float requirements and even increased equity shares for insurers – other exchanges will be tuning up their listing reforms and tallying up the deal flow, all on the back of lessons learned from the US SPAC market.

Why Intertrust Group?

  • Intertrust Group’s local knowledge and flexibility could prove cost-effective should your funds be exploring Special Purpose Acquisition Company transactions, either to purchase or to realise through an exit.
  • We are the largest provider of special purchase vehicles (SPV) to the private equity market, administering 18,000 across the world’s main fund centres.
  • We are the only central bank licensed escrow service provider in Europe experienced in facilitating SPACs. Our tailor-made escrow agreements are geared to service cross-border transactions, governed by the laws of many key jurisdictions.
  • We are able to act as a Listing and Transfer Agent on The International Stock Exchange (TISE).
  • We have breadth, end-to-end ability and give limited partners and general partners a unique review of their funds.