The political appeal of SPACs

The UK may soon relax rules on special purpose acquisition companies, partly because the nation’s corporates are seen as vulnerable to foreign takeovers.

The UK is considering relaxing rules on SPACs to attract more listings of high-growth companies.

A report from Jonathan Hill, the former EU Commissioner for financial services, has made recommendations to the British government to make the UK a more attractive venue for floating fast-growth firms. One of the eye-catching proposals centres around SPACs (Special Purpose Acquisition Companies), which are ‘empty vessels’ floated on a stock exchange, which then use the proceeds of their IPO to merge with another firm or firms. SPACs accounted for half of all IPOs in the USA last year, yet there were none in the UK.


Most of the reason for this lies in the UK’s public exchange rules, which require a SPAC’s shares to be suspended upon declaration of a pending deal until the transaction is done. The process is viewed by UK regulators as a reverse takeover, so on both the Main Market and the AIM, the new group will likely need to reapply for a listing. The rules are designed to support stability and transparency rather than bubbly speculation on upcoming deals. However, they also raise an investor’s exposure: in the US, if you don’t like your SPAC’s acquisition target, fine, sell your shares. In the UK, shareholders must “dance with the one that brung them”. The moment that a deal is announced, they’re locked in until it’s done. None of this has stopped London SPACs completely, but they have struggled most recently while US SPACs have thrived. The Hill Review recommends removing those barriers and ensuring shareholders have a right to vote on any proposed acquisition.


Creatures of political risk


The speed and simplicity of a SPAC is what attracts investors, with everything neatly lined up ahead of the deal. SPACs have surged in popularity at times of low interest rates and high economic uncertainty, including as a result of political risk. The recession and low growth of 2010-11 saw a SPAC surge and so has the past couple of years in the USA, with a pandemic and a tectonic realignment of global trade. In the UK, there was some pick up of SPACs after the 2016 Brexit referendum. Such uncertain circumstances drive investors to seek alternatives to the traditional, messy IPO, but they’re also very appealing to politicians here in the UK. There are two major reasons for that.


The first is the fallout from Brexit. A deal was done, but much is still on the table including financial equivalence. The City’s pre-eminent status is still in play and the British Chancellor Rishi Sunak has prioritised defensive measures against raids from the EU. Amsterdam has already stolen London’s equities crown. That is largely symbolic. Equities are a tiny fraction of London’s activities, dwarfed by derivatives and foreign exchange. London is still the second largest market for international IPOs, the largest for non-tech IPOs and it is a concentrated centre of excellence across multiple functions, whereas the EU’s financial centres are spread across the bloc.


However, symbols matter in politics. Britain spent a vast amount of political capital on its tiny fishing industry during the Brexit negotiations because the image of sovereign control matters more than the economics do. Sunak does not want London to be seen to be taking further hits, so he asked Lord Hill to look for ways to make the City more attractive as a deep and accessible pool of capital. SPACs are clearly part of that mix.


The second is more realpolitik. Whereas George Osborne, Sunak’s predecessor but one, was relatively relaxed about foreign takeovers of British companies and assets (he saw them as much-needed investment in cash-strapped Britain), the current administration is less so. New measures such as the National Security and Investment Bill and a reversal on Huawei show ministers’ raised awareness of foreign actors in the British economy. But more broadly they are cognizant that British corporate assets are facing an onslaught of bargain basement M&A activity. Two large factors have combined to make this happen. Four years of Brexit uncertainty have left British corporates undervalued, especially in the mid-cap market where research is more thinly spread. Secondly, the pandemic has compounded that devaluing effect whilst also creating a record pile of capital raised off the back of loose monetary policy, especially low interest rates, around the world.


Faced with a sell-off of the UK’s wealth creators, the Government would much prefer these assets to list on British stock markets. That has a few positive effects, all of which play into useful political narratives. Firstly, they stay here in the UK (at least nominally), avoiding tricky questions about whether Ministers will intervene to save flagship brands, either with strong British heritage (like the motor group AA) or younger firms with strong growth potential (e.g. Codemasters). The longer term flexibility offered by SPACs appears to be attracting some private equity partners to the model, since it allows them to go beyond the five-year cycles that constrain the traditional PE approach. Secondly, retail investors here can take a share in such brands and their potential for growth, a reminder of the popular ‘Tell Sid’ IPO of British Gas under Margaret Thatcher. Additionally, any IPOs in London will help to counter that wider narrative about the City of London losing its lustre. Finally, they help to release that pile of raised capital on asset managers' balance sheets into the economy, lowering the need for state interventions such as QE with its distortive effects.


Politics vs bubble risk


Not everyone in the UK’s regulatory establishment is enthusiastic about SPACs, with good reasons to be wary of a bubble. SPACs tend to be subject to fewer listing rules because they allow firms to 'back into' already listed firms, which is both part of the appeal for investors and part of the concern for regulators. But Brexit has raised UK political risk in a way that has real-world effects on the movement of capital to and from these shores. Politicians know that and have a growing list of reasons to push back against their more cautious advisors. A broader deregulatory drive is underway at the heart of government, looking for ways to realise new freedoms from EU strictures. SPAC rules were never held back by those strictures, but Ministers will be keen to sell the reforms as part of a bright post-Brexit dawn.



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