Whilst capital raising using SPACs has been tremendously successful in the US over the last 12-24 months, the UK had until the start of this year experienced significantly less activity both in terms of SPACs and IPOs as the woes of Covid and Brexit have weighed on the markets. There was much anticipation that the US SPAC frenzy would stimulate similar activity in the UK but this has yet to translate. Those more seasoned market participants will recall that UK interest in SPACs has waxed and waned over the years – a good few in 2007-2009 and then again in 2016-2017 with a few making it through the gate thereafter, but generally SPACs have failed to gain significant traction. The earlier interest in SPACs (c2009) was fuelled by investors searching for alternative investment opportunities and sponsors seeking other sources of capital as private liquidity sources dried up. Many SPACs, while raising the initial capital, failed to meet investors’ expectations. The more recent UK SPAC spurt in 2017 (when 15 SPACS listed in London) comprised more significant listings - J2 Acquisition, Landscape Acquisition Holdings, Ocelot Partners and Wilmcote Holdings represented 99.1 per cent of total funds raised by UK SPACs in 2017, with J2 Acquisition raising US$1.25 billion – the largest amount raised by a London SPAC since 2011. Investors were attracted by the opportunity of investing in and benefiting from an increase in the value of assets (acquired by the SPAC) that they would otherwise not have had access to (as evidenced by the upsizing of the offering in J2 Acquisition from US$750m to US$1.25bn).
In the UK, SPACs are considered cash shells which are not eligible for listing on the Premium segment of the Official List. They are only eligible to list on the Standard segment. The main attraction of a Standard listing for SPACs (besides that of eligibility and the benefit over a listing on AIM) is that Standard listed companies do not have to obtain shareholder approval for material acquisitions post-listing. This allows transactions to be closed more quickly post capital raise and contrasts with the US where shareholder approval is usually required for any subsequent acquisition.
The main reason often cited for SPACs not catching the imagination of UK investors is the Financial Conduct Authority (FCA) requirement that the shares of a UK SPAC be suspended from the time of announcement of an acquisition until an FCA approved prospectus is published (as a consequence of the transaction often being classified as a reverse takeover under the Listing Rules). This effectively locks any dissenting investors into a transaction they do not support for a protracted period. While this requirement was introduced to manage concerns around small SPACs floating, it has driven away larger vehicles from London to the SPAC-friendly US market where there is no such requirement.
However, the winds of change look to be blowing, if not across Gorky Park then potentially through the London Stock Exchange. Earlier this month, the results of the UK Listings Review were delivered by the former EU financial services commissioner Lord Hill. The Hill Review set out various recommendations aimed at bolstering the competitiveness of London’s public markets, including with a view to making SPACs more attractive to investors and potential acquisition targets. As Lord Hill stressed, the new proposals are ‘not about opening up a gap between us and other global centres by proposing radical new departures to try to seize a competitive advantage… it is about closing a gap which has opened up.’.
Reform of the suspension requirement resounds throughout the Hill Review, along with other measures to boost capital market effectiveness, including reducing free float requirements from 25% to 15% and permitting dual class shares to allow founders to retain greater control and attract high-growth tech companies. In addition to reviewing the suspension requirement, the Hill Review also suggests that the FCA should specifically consider developing, as appropriate, rules and guidance on (i) the information which SPACs must disclose to the market upon the announcement of a transaction in relation to a target company; (ii) the rights investors in SPACs must have to vote on acquisitions prior to their completion; and (iii) the rights investors in SPACs must have to redeem their initial investment prior to the completion of a transaction.
Overall, the recommendations in the Hill Review have been welcomed by bankers and lawyers as well as the FCA itself, which has announced that it aims to publish a consultation paper later this year , with new rules expected by late 2021. It remains to be seen whether the proposals outlined in the Hill Review will, as the UK Chancellor, Rishi Sunak, has stated, herald the start of a post-Brexit Big Bang 2.0 – referring to the period of financial services deregulation in London in the 1980s. These changes may also lead to renewed interest in SPACs from private equity firms acting as SPAC sponsors – the increased flexibility in SPACs will provide an additional permanent capital option to supplement the traditional private fund limited partnership structures.
Despite London’s IPO activity and pipeline starting well in 2021 (with IPOs/planned IPOs of Dr. Martens Plc, Moonpig Group Plc, Fix Price, Trustpilot and Deliveroo), continued international competitive tensions remain with Amsterdam’s Euronext snapping at the heels of London to become the European frontrunner in attracting SPAC listings. There is much to play for and all eyes will be focusing on whether the changes to be introduced by the UK regulators will indeed light the SPAC fuse. Watch this SPACe!