SPACs (special-purpose acquisition companies) give start-ups an alternative to listing publicly. They are essentially public investment vehicles with a mandate to buy large stakes in start-ups. Instead of listing on a public exchange, start-ups can be bought by a SPAC – securing a large capital raise as well as allowing early shareholders to cash in. The benefit of a SPAC exit is it avoids much of the regulation and red-tape that comes with going public normally. Meanwhile, SPACs often offer start-ups the same valuation they expected to get on the public market. Moreover, SPACs are themselves publicly traded, so retail investors can still indirectly buy-in to the success of a start-up.
2020 has seen a fast growing group of SPACs sponsored by private equity, venture capital and hedge fund titans. In 2021 they will aim to deploy tens of billions of dollars, upend conventional IPOs and deliver huge returns to themselves all at a relatively modest risk. However throughout 2021 the clock will be ticking louder and louder as they only have two years to make it happen or the money raise is returned to investors and the titans walk away empty handed and with a sullied reputation.
What can we expect in 2021?
- There will be intense competition amongst the SPACs looking for target acquisitions. The class of 2020 collectively raised more than $73 billion.
- Stiffer competition could lead to friendlier terms to woo targets. Already some dealmakers have been reducing their promote fee in exchange for striking a merger.
- Potential target companies can cast a wide net as they evaluate what the different SPACs can bring to the table. One merger target recently revealed they were talking to 14 different SPACs.
- Some of the SPAC sponsors are differentiating themselves by packing their boards with a who’s who of industry heavyweights. Kensington Capital merged with electric-vehicle battery maker QuantumScape after assembling a board of automotive executives that included former CEO’s of Fiat, Chrysler and roof rack maker Thule.
- Attention could turn to European SPAC listings. Multiple European exchanges and regulators are competing to become the most favourable exchange and jurisdiction to list a European SPAC. They are working to change rules to allow vehicles to look and feel like a US structure in order to attract money from the robust US investor base. If one of the initial European SPACs in 2021 trades well post-acquisition, then expect others to follow suit and a listing frenzy will begin.
Private investments in public equity (PIPE deals) are vital to closing take-overs. The original investors in SPACs tend to be a concentrated group of financial firms, commonly called the “SPAC mafia”. These investors typically look to sell/redeem their investment at the time of the merger. PIPE investors are needed to replace the redeeming investors otherwise the music stops and the house of cards falls down. The rush of SPACs in 2020 exhausted much of the available PIPE capital towards the end of the year. PIPE investment levels will need to be replenished in 2021 and if the SPAC phenomenon continues we could see new sources testing out investing into PIPE deals.
Since 2001, CSS Partners has raised over £175m for ambitious growth companies. Over this time we feel we have developed a good understanding of what investors want.
CSSP backed companies will often offer EIS Shares so investors can use the significant tax breaks of the UK Enterprise Investment Scheme to help mitigate the risk of venture capital and maximise returns.
Investments offered by CSS Partners are not appropriate to all investors. Our free client service aims to be of benefit to high net worth and sophisticated investors looking to achieve higher returns.
20 January 2021
The information in this website is provided by CSS Partners LLP. This website has been approved for the purposes of section 21 of the Financial Services and Markets Act by Charles Street Securities Europe LLP (CSSE), which is authorised and regulated by the Financial Conduct Authority. CSS Partners is an appointed representative of CSSE.
Any views or opinions expressed in this blog are those of the author alone, except where specifically stated that they are the views of CSS Partners LLP.
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