Are SPACs set for a spectacular future?
Over the past year special-purpose acquisition companies, or SPACs, have been one of the buzziest parts of the US financial markets, with a record $83bn of funds raised in 2020 and more than $79bn so far this year.
Their rapid growth in the USA probably has as much to do with Reddit and celebrity endorsements as it does the need for another way of raising equity. However, the SPAC boom is now looking like it could come to the UK, with Rishi Sunak’s review of the London Stock Exchange’s rules suggesting that loosening restrictions on SPACs should be a priority.
So, what is a SPAC? They are often known as ‘blank cheque companies’, as they exist only to raise money for deals, and also because investors in them are often (though not always) investing blind, trusting that the management of the SPAC will find the right deal to do. They aren’t a particularly new idea, as the concept of reverse mergers has been around since the 1970s, and was particularly prevalent just after both the dotcom bust and the global financial crisis.
Over the past year special-purpose acquisition companies, or SPACs, have been one of the buzziest parts of the US financial markets, with a record $83bn of funds raised in 2020 and more than $79bn so far this year.
Their rapid growth in the USA probably has as much to do with Reddit and celebrity endorsements as it does the need for another way of raising equity. However, the SPAC boom is now looking like it could come to the UK, with Rishi Sunak’s review of the London Stock Exchange’s rules suggesting that loosening restrictions on SPACs should be a priority.
So, what is a SPAC? They are often known as ‘blank cheque companies’, as they exist only to raise money for deals, and also because investors in them are often (though not always) investing blind, trusting that the management of the SPAC will find the right deal to do. They aren’t a particularly new idea, as the concept of reverse mergers has been around since the 1970s, and was particularly prevalent just after both the dotcom bust and the global financial crisis.
Alternative routes
Instead of directly listing on a stock exchange, companies merge with a shell company that has been set up for the sole purpose of raising funds, listing on a stock exchange and then using the cash raised to acquire another company.
What they offer to the management and investors is a way to go public more quickly, cheaply, and be less stringently examined than a traditional IPO. This final point is where some of the concerns about the recent growth of the sector begin to arise. Celebrity endorsements have brought SPACs to the attention of retail investors, and this combined with the usually low buy-in price ($10/share being typical) and the prospect of high returns has rapidly made them seem like the next big thing. However, the fact that companies can raise money talking about potential future performance (rather than focus on current performance as they would with a normal IPO) does increase the potential risk to investors. In the UK, Lord Hill’s review has suggested that the UK regulators need to look more closely into what data SPACs raised in the UK would need to disclose.
However controversial they may be, they do offer companies an alternative way of accessing the public markets to raise money. Bringing them to the UK is probably also an important tool to stem the steady leakage of corporate capital raising from London to New York that has been happening in recent years.
So why should those of us who work in real estate start paying attention to SPACs? While the largest part of the US SPAC market is software and R&D-focused, some big property names have also started to launch SPACs. Last year Tishman Speyer raised $300m this way and subsequently bought Latch, and both CBRE and Simon Property have each raised $300m for unspecified investments. There are also an increasing number of PropTech companies that are either raising money this way, or being bought using SPAC money. Recent examples include Latch, Porch and Opendoor. Finally there is the issue of the growth of, and thereby an increase in occupier requirements from, the industry that launches and supports these new vehicles – a particularly important question when banking and financial services in the UK are still sat in a mist of indecision around post-Brexit trade with Europe.
We probably won’t see many SPACs launched to buy companies that own or develop property, as investor demand in the SPAC sector is typically biased towards low entry costs and high growth. However, bits of the real estate market that are closely aligned to high growth industries might well be ‘SPAC-able’. These could include datacentres, cold storage and lab provision.
While the obvious conclusion to a boom in the SPAC market in the UK might be that it will only benefit the City of London in terms of more jobs in banking and broking, I believe that the biggest beneficiaries might be the science and tech hubs in the regions. This new source of equity raising will enable companies in those locations to grow faster, and thus their demand for property in those towns and cities will also grow quickly.
Mat Oakley is head of UK and European commercial research at Savills
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