Trends Collide
Post-Brexit IPO market competition is heating up. Amsterdam, Frankfurt and Paris vie to claim London’s crown as the financial capital of Europe. Add New York, Hong Kong and Singapore to the contest and many in The City are starting to sweat.
Enter Rishi Sunak and the hotly anticipated independent review of the London Stock Exchange rules. When commissioned by the Chancellor last year the instructions were clear: Britain must continue to “lead the world in providing open, dynamic capital markets for existing and innovative companies alike”.
The review – conducted by former EU financial services commissioner Lord Jonathan Hill – set out a host of reforms designed to “encourage investment in UK businesses and support the development of innovative growth sectors such as tech and life sciences”.
Two caught everyone’s attention: the recommendations to remove a requirement for trading in Special Purpose Acquisition Companies (SPAC) shares to be suspended during a takeover, and for the regulator to produce guidelines on the data SPACs must disclose.
One of the hottest trends in capital markets, $83bn worth of global deals were facilitated through SPACS in 2020 - officially outpacing traditional IPOs. The US has led the race. London’s IPO market has lagged sluggishly behind.
The so-called blank cheque companies have become increasingly popular as they provide a quick path for young, innovative and capital hungry private companies to quickly come to market. The cash is already on the table when negotiations begin. And investors approve because they can quickly put their cash to use, particularly while interest rates remain low.
But wait. The sheer volume of recent SPAC listings has alarmed some regarding the quality of the vehicles and led to calls for tighter controls on issuances. They are attractive as they enable companies to get around certain listing requirements - requirements put in place to protect and reassure investors.
As noted by my colleague Elisabeth Steyn in January, 2020 was also a watershed moment for another hot trend in equity markets: ESG. Commentators question whether the two trends can continue together.
Ross Klein, Chief Investment Officer at Changebridge Capital, points out that the very nature of SPACs means there is no clear way of assessing the environmental or social impact of a target acquisition; you can only integrate a target business’ strategy, financials and management team after a deal has been announced. And that can be a problem. Amundi SA, Europe’s largest asset manager, told Bloomberg it is reluctant to hand over its clients’ money to third-party SPAC sponsors for this very reason.
Funds applying ESG principles captured $51.1bn of net new money from investors in 2020 according to Morningstar. That is a lot of capital high growth companies may never claim if they choose to come to market through a SPAC deal.
If the Chancellor moves swiftly to introduce Lord Hill’s recommendations to London’s SPAC rules, and the FCA puts in place regulations to create an environment for high quality and ESG-friendly SPACs to thrive, it could give The City the competitive edge it needs to excel post-Brexit. But it needs to be done correctly and quickly to ensure the proper safeguards are in place to protect investors. Amsterdam has just scored Europe’s first ESG-focused SPAC listing worth $303 million.
In the meantime, companies seeking to raise capital should carefully consider the best route to take. Overinflated valuations from multiple SPAC suiters may cause excitement initially, but their ability to generate real and sustainable value in the long term is still to be determined.
If you are considering sponsoring a SPAC, proactively setting and communicating clear ESG criteria for the acquisition, as well as your management team’s performance, will be the key to success as the hottest trends of 2020/21 collide.