Venture Capital/Opinion/

Is it time for more SPACs in Europe?

The US has been hit by a SPAC craze — but they haven't taken off in Europe, yet. Why not?

Credit: Chamath Palihapitiya
Nicolas Colin

By Nicolas Colin

It’s not entirely clear why SPACs have become so popular over the past year. One explanation is that founders, VCs and angel investors have become impatient: IPOs were long seen to be too scarce, too costly and happening too late in a company’s life.

But IPOs have been multiplying since 2019, and SPACs — special purpose acquisition companies — are still on the rise, so surely there’s another explanation than just more companies wanting to go public?

Maybe there’s just too much capital to deploy and not enough return-generating assets in which to deploy it, with growing appetite from investors for tech companies. 

Maybe it’s because, as once explained by VC Chamath Palihapitiya, a SPAC — a company that’s listed on a stock exchange and is loaded with money raised from investors so as to acquire a target that isn’t yet public (and hasn’t likely been identified yet) — better fits the need to share inspiring storytelling about the future. Indeed, regulations prevent such storytelling from taking place when a company goes public the traditional way: with an IPO you usually only hear about risks, risks, risks.

Or maybe SPACs, which reward their founders with 20% of the shares pre-merger even without their contributing much capital, are simply a financial opportunity that fees-hungry investment bankers and famous founders (such as former US House Speaker Paul Ryan, football star and Black Lives Matter icon Colin Kaepernick and seasoned hedge fund manager Bill Ackman) don’t want to miss.

SPACs and Europe

In any case, where is Europe in this craze? If SPACs are a more convenient replacement for IPOs, then Europe should have been racing ahead in embracing them. The fragmented structure of the continent’s stock markets already make them less of a good fit for the traditional IPO process. 

“If SPACs are a more convenient replacement for IPOs, then Europe should have been racing ahead in embracing them.”

Instead, the US is showing that SPACs are less of a replacement and more of a complement to traditional IPOs: an additional layer that contributes to amplifying the trend of more tech companies going public. 

The case for Europe tackling the SPAC challenge has been made by several prominent figures: former Barclays executive Makram Azar, former Jimmy Choo CEO Pierre Denis and former London Stock Exchange CEO Xavier Rolet. The UK in particular might want to make things easier for those willing to raise a SPAC, in the pursuit of becoming the go-to place for any European tech company that wants to become public this way. After all, there’s a new competition between post-Brexit Britain and the continent; as the financial services industry slowly regroups around Amsterdam, London might find that its best shot is in specialising in various forms of alternative financing that benefit from greater regulatory leniency — from hedge funds to crypto to… SPACs. The British chancellor Rishi Sunak is reportedly looking into changes to the listings regime already.

SPAC speedbumps

The current enthusiasm might not last, though. Three adverse trends could contribute to curbing it.

The first is capital becoming scarce and expensive again. There’s not an article covering financial markets these days that doesn’t point out the risk of inflation returning and the probability that interest rates will go up again once the economy starts to recover from the pandemic. If that happens, investors will find themselves with less capital on their hands and start thinking twice before allocating capital to expensive SPACs.

If these really are the new IPOs, then it shouldn’t be a surprise if regulators end up writing rules for them like they do for IPOs.”

The second adverse trend is the potential tightening of regulations applying to SPACs themselves. If these really are the new IPOs, then it shouldn’t be a surprise if regulators end up writing rules for them like they do for IPOs — if only to make sure we don’t have too many SPACs end up in a situation like self-driving truck company Nikola (which was accused of misleading investors about the ability of its trucks to drive themselves). Or regulators could lower the barriers to an IPO in order to support more companies going public and more investors being rewarded with liquidity, making SPACs lose much of their relative attraction from a regulatory perspective.

Finally, even in the presence of a favourable regulatory environment like the one the UK could set up, SPACs could simply fall out of favour, similar to what occurred with crowdfunding. Remember the enthusiasm once inspired by the US’s 2012 JOBS Act which made crowdfunding cheaper and easier? Some fans predicted that this new mode of funding could very well replace pre-seed angel investing. What happened, instead, was the exact opposite: angel investing has grown like never before, lifted up by platforms like AngelList and prominent figures leading syndicates. It’s as if crowdfunding provided founders with more leverage and a greater ability to close deals with hesitant investors, bringing the entire market to a new equilibrium before receding back to the margins.

“SPACs could accelerate progress toward earlier, simpler and cheaper IPOs.”

SPACs could play the same role on the IPO market: making investors and investment bankers realise that there is another way, albeit more expensive, and contributing to accelerating progress toward earlier, simpler and cheaper IPOs. This is the most likely scenario, especially if the entire asset class of SPACs undergoes what a friend of mine called “a bifurcation between two different outcomes”: a high end, where respected private equity firms fund SPACs that then merge with attractive businesses; and a low-end, where crappy financial sponsors meet crappy businesses. As they wrote, sadly, “the latter might discredit the whole SPAC phenomenon.”

In the meantime, should Europe bet on SPACs anyway?

For the moment, why not? I think trial and error should be the rule on European financial markets in desperate need of a radical upheaval. SPACs might end up ruining a few wealthy investors, but, unlike other innovations, they’re certainly not akin to subprime mortgages, with the power to bring down the entire banking system.

So why should we Europeans lag behind, as we too often do?

Nicolas Colin works for The Family and writes a regular column for Sifted.

2
Join the conversation

avatar
  Subscribe  
newest oldest
Notify of
Alex Pospekhov
Alex Pospekhov

Well EU must have unified rules for SPAC or London will do it this year without no doubts. Lot’s of things been done to support small companies go public (MIFID II regulations with MTR), so now you need only 3K EUR to list your shares in Latvian or Estonian NASDAQ. But its only useful for well established models, especially not software one.

Melonfarmer
Melonfarmer

Is it the 20% pre-merger share option that differentiates a SPAC from the 90s/2000s option of reversing into a cash shell? AIM was littered with them, if my memory serves me correctly.