The Recent Resurgence of UK SPACS and Latest Trends
By Paul Amiss, Partner, Winston & Strawn LLP
Whilst the market for SPACs has been strong in the US for a number of years, 2017 was a particularly strong year with just under $10bn being raised in aggregate through 34 separate vehicles. This has acted as a driving force for SPAC IPOs elsewhere, more so in the UK where in excess of $2.3bn (£1.7bn) was raised in 2017 alone.
What is a SPAC ?
A special purpose acquisition company (“SPAC”) is a newly incorporated company with no existing operations or underlying business that is founded by one (or a group of) sponsors, being well known entrepreneurs, private equity or industry experts with the objective of making one or more platform acquisitions. Its funds are raised through an IPO of its shares on a stock exchange(or units in the US) and such funds are deployed to make its acquisition. It is also known as a “cash shell”, an “investment company” or a “blank check” company.
The SPAC’s investment strategy is published in its listing document – such strategy may be industry specific or it may be more of a general mandate, depending on the track-record of the founders.
Recent Trends in the UK
In the UK,there was a surge in SPACs shortly after the financial crisis from 2009 to 2011 where sponsors sought alternative sources of capital that was otherwise unavailable in the private markets and investors sought alternative investment opportunities. However following a series of high profile failures (with the odd notable exception)investment demand forthe model dwindled.
More recently SPACs are re-emerging in the UK as a viable investment for institutional investors. Such investors are being attracted by the private equity derived skill-set of sponsors and the opportunity to invest in,and derive substantial value from, assets that would otherwise not have been immediately available to them through the public markets.
This is evidenced by the IPOs of J2 Acquisition and Landscape Acquisition Holdings in the UK which between them raised in excess of $1.75bn in the last quarter of 2017. In fact 15 SPACs listed in London in 2017, a significant increase on the previous two years.
One of the most interesting aspects to the J2 Acquisition IPO is not so much that it was the second largest SPAC in history (it raised $1.25bn) and that it was the 8th SPAC vehicle for Martin Franklin (Mr. Franklin has raised more than $7bn in previous vehicles including Justice holdings in 2011 went on to merge with Burger King) but that there was a roadshow “hit rate” of 90% and 55% of the order book had never invested in any of Mr. Franklin’s previous SPACs. Such was the underlying demand for shares in the vehicle, the fundraise was upsized from $750m to $1.25m.
Drivers Behind the Trend
As an alternative route to raising capital beyond the traditional limited partnership structure, executives from private equity firms are increasingly acting as SPAC sponsors. This is starting to underpin investor confidence in the model. In this way,the success of private equity over the last two decades is beginning to feed a demand for “public equity”as private equity executives look for permanent capital options to complement their more traditional private fund limited partnership structures.
In the traditional private equity limited partnership model,returns are typically made to investors within 5 years but through a permanent capital listed structure investors are instead able to realise their investment through selling their shares on the stock exchange. Such a model thereby provides sponsors with more time within which to generate real returns.
A SPAC also has the added benefit of being able to issue paper as part of the consideration for its acquisition which(being in the form of listed shares) is more marketable than equity issued to management on a traditional private equity buy out. This can provide sponsors with more firepower to make their acquisition.
For investors, low interest rates and high market valuations in the equity capital markets have contributed to financial institutions looking elsewhere to deploy their capital. The perceived ease of exit for investors either through the “money back” feature following a failed or no deal situation (see below) or via freely transferable and liquid shares in the market following an acquisition have also made SPACs an attractive option for institutional investors.Market commentators are saying that this trend is set to continue into 2018.
Main Features of UK SPACS
The founders (or sponsors) will incorporate the company and invest a nominal amount of capital to cover the fees of the IPO process.
On IPO, investors will typically receive shares and warrants (representing the right to acquire additional shares at a 15% mark-up to the IPO price) in the vehicle. The founders or sponsors will often have a 10-20% equity holding and may hold a combination of ordinary shares or performance related preference shares which entitle them to a certain proportion (often 20%) of the upside when the share price of the company following its acquisition reaches a certain level (often a 15% hurdle).
This so-called “promote” structure for the founders is structured so as to create a positive alignment with institutional investors. This is often what is known as the “public equity” aspect to the vehicle, private equity principles in the form of shares in a listed company to incentivise the founders to generate value for investors.
The sponsors (or founders)generally sit on the boards of the listed companies and perform investment management services to the SPAC to identify and execute the acquisition.
The cash raised from institutional investors on IPO is often held in a ring-fenced bank or trust account (which may be administered by a third party trustee) and may not be released until completion of the acquisition. Often interest earned in the account is used to fund working capital expenses incurred post IPO but prior to acquisition.
In the event that an acquisition is not made within the specified timeframe, normally 24 months, funds are returned to shareholders (the “money back” feature) and the company is wound up. Sponsors often bear the cost of the expenses of the company from incorporation to winding up through the principle of “first loss“capital whereby cash is returned investors in priority to the sponsors.
The principles of “first loss” capital and the founder “promote” structure therefore combine to incentive the founders to identify and execute the acquisition of an attractive target within the stated investment strategy and within the designated timeframe.
Process for a UK Listing
In the UK the most common listing venue to list a SPAC is by way of a standard listing on the Main Market. AIM has traditionally been more suited for smaller IPOs although more recently a number of smaller vehicles have listed on the Main Market, to take advantage of the perceived advantages of such market (see below).
There are certain important consequences of the choice of listing venue in the UK (whether as a standard listed company on the Main Market or an AIM listed company) and the main differences are summarised in the table below:
|Listing document||Prospectus||Admission Document|
|Shareholder approval on acquisition||No||Yes|
|Minimum raise on IPO||£700k||£6m|
|Investment window to implement acquisition||No formal requirement (2 years is normal)||18 months|
|Adviser||No formal requirement||Nomad|
|Shares in public hands||25%||No formal requirement|
As a consequence of the above, notwithstanding the added administrative and cost burden involved in producing a prospectus (and having it approved by the UKLA), and the requirement for 25% of its shares to be held in public hands (being independent shareholders each holding 5% or less), a standard listing on the Main Market of the London Stock Exchange has become the favoured listing venue for SPACs. This is principally because the SPAC does not require shareholder approval to make its acquisition (provided of course that such acquisition is within its investment strategy). A Main Market listing is also seen by some sponsors as somewhat more prestigious than AIM.
Following IPO, on the announcement of an acquisition but before its completion the relevant exchange will suspend listing of the company’s shares if it believes, having considered the information in the market on the target at the time, that there is or may be a disorderly market or it is otherwise necessary to protect investors.
The acquisition by a SPAC constitutes a “reverse takeover” under relevant exchange rules and as such the relevant exchange will generally cancel the listing of the SPAC’s shares upon the completion of the acquisition (unless the target is already listed and subject to the same disclosure requirements) and the shares of the enlarged group are readmitted to trading upon publication of a prospectus for the enlarged group (in the case of a standard listing) or an admission document for the enlarged group (in the case of an AIM listing).
Key Difference between US and UK SPACs
One of the key differences between US and UK SPACs is that in the US, shareholders get a vote on the acquisition and they are able to redeem their shares if they do not want to invest in the underlying target. This creates some uncertainty with respect to closing, which while avoidable through deal structuring, can be a deterrent to potential sellers.
This is not a feature of the typical SPAC on the Main Market in the UK and (as indicated above) is one of the reasons why the Main Market is preferred by some sponsors as it gives them the ability to have deal certainty and to execute acquisitions quickly following a successful IPO.
This needs to be balanced of course with the fundraise process on IPO in the US. With a shareholder vote and a redemption option, the fundraise process for a SPAC in the US is generally viewed as being easier than in the UK as ultimately investors are able to get clarity on the underlying business that they are going to invest in (through the shareholder vote) and more importantly, they have an ability to extricate themselves(by way of redemption) if they do not like the target.
Furthermore, in the US some investors may opt to redeem their shares but retain their warrants on the acquisition, thereby enabling them to be reimbursed their initial capital invested on IPO but hedge their bets by taking a stake in a successful acquisition at an attractive price through the exercise of their warrants at a later date.
These factors can inevitably lead to more investor demand on a US SPAC IPO but (without deal structuring) less transaction certainty on acquisition. This is often contrasted with a more challenging fundraise on a UK SPAC (which may be improved by structuring) but without a shareholder vote or a redemption option, a greater degree of deal certainty on acquisition.
The London market for SPACs appears to be growing as investors and sponsor teams seem to have both gained confidence in the model. The use of SPACs by private equity executives with strong track records is contributing to this growth. The impetus from 2017 is therefore expected to continue and we are seeing a much greater interest than before in the model. This in turn is set to feed M&A activity into 2020.
How fintech companies can facilitate continued growth
By Jackson Lee, VP Corporate Development from Colt Data Centre Services
The fintech industry is rapidly growing and, in the first half of 2020, fintechs have secured more than $25 billion in investment globally, despite the huge uncertainty caused by COVID-19. As fintechs and their customer base expand, it is important to recognise that the success of these companies is predicated on the ability to use data effectively in providing a personalised experience to their customers.
To ensure these companies do not become victim of their own success, they must ensure they have the ability to scale up their operations and data storage as quickly and cost-efficiently as possible, especially in these challenging times.
So what must fintech companies do if they are to facilitate this growth without bursting at the seams?
Big fish in a small pond
Fintech companies are growing exponentially, and for many, even the current uncertainty around the pandemic has not decelerated the pace of their growth. However, having started small – with only having access to limited tools at the beginning of their journey, many fintech companies can’t keep up with their own rapid growth. When it comes to data infrastructures, they are facing a real risk of becoming a big fish in a small pond.
In order to achieve widespread innovation, and to keep their advantage over traditional financial institutions, fintech companies need the necessary playground space to experiment in.
When the pandemic and its consequent disruptions started to take hold, most businesses weren’t prepared for the types of challenges that they would have to face. Although the suggestion of investing in data infrastructure might seem counter intuitive at the moment, a lifeline for fintech companies going forward will be flexibility and the ability to scale.
As the uncertainty around the pandemic continues, fintech companies, like other industries are finding it difficult to commit to long-term business plans. Despite their continued growth, fintech companies continue to be cautious to invest in expanding their operations during an unpredictable economic climate, especially when they are doing well enough as it is.
Even before the pandemic, fintech companies exhibited slower rates of the adoption of digitalisation and advanced IT infrastructures than other industries. It’s clear the future is digital and for fintechs to effectively compete in today’s volatile market, they need to be proactive and invest in the value of data and digital transformation.
One area that fintech companies must be proactive in is their IT infrastructure, especially their data storage and connectivity, in order to allow them to act faster than big, established competitors.
Due to the continuous growth of fintech companies, with no sign for it to slow down, these companies will have to continually scale their operations up to manage increased demand. Ordinarily, this would have very high costs as they would have to continually alter their IT infrastructure and solutions.
When it comes to flexibility, data is a crucial aspect for fintechs. In today’s world, companies store masses of data, and its amount is growing fast. This makes the storing of the data a juggling act, and the costs keep growing with it. In periods of economic uncertainty, such as the one we are experiencing now, this constant increase in data can quickly turn into a challenge. Therefore, fintechs must ensure that scalability is at the heart of everything they do. When it comes to scalability, however, the key factor is not just growth or the ability to scale up. A vital, but often overlooked opportunity in scalability lies in scaling down, when needed. For fintechs aiming at this level of scalability, hyperscale is the only way forward.
The answer is hyperscale
Hyperscale data centres provide businesses with a one-stop shop for all their data and capacity requirements. These centres, which are built in a campus-style design, allow companies to build out further data centres quickly within the same location, or if needed, downsize. In an environment of ever-fluctuating demand, hyperscale enables scalability of data and storage swiftly. This presents many benefits. The sheer size of these facilities allows for large-scale cloud adoption, which is more streamlined, flexible and cost-effective than ever before. This will help fintechs to get a better handle on their data and reduce costs as much as possible.
With this level of scalability, companies can operate like an elastic band, expanding or retracting when necessary and at a moment’s notice. For example, imagine this year’s Christmas. With the uncertainty of the pandemic and constantly changing restrictions, people’s online activity will be even higher than in previous years. Fintechs will have to scale up their operations to cope with the high demand of online services. Meanwhile, when demand goes down in January, it might be beneficial to scale down and reduce costs until demand increases again.
Hyperscale will also help fintech companies to future-proof their operations, which has become a key consideration as the economy looks to recover from the pandemic. By having the level of flexibility that hyperscale provides, businesses will always have the ability to lean or expand. Being able to adjust quickly within the hyperscale environment, with no added costs, makes fintechs more resilient and flexible to disruptions.
While cutting costs will continue to be a priority in today’s business environment, it is important that fintech companies look beyond this and focus on innovation and technology. The issues that the pandemic unearthed already existed and needed to be addressed by businesses. Therefore, they need to take the current situation as an opportunity to reconsider and improve their business models. Flexibility, scalability and cost efficiency must be top priorities in this new era. Hyperscale can provide this trinity of success.
2021 Predictions: Operational Resilience Takes Center Stage
Breaking down barriers between Risk and Business Continuity
By Brian Molk, Fusion Risk Management
What a year! Simply put, the global shocks of 2020 were unmatched by any time in recent history. Not only did the COVID-19 pandemic reach a scale and longevity that rippled through the way organizations operate, communicate, and safeguard against future disruptions, we simultaneously experienced civil unrest, wildfires, hurricanes and more. This unprecedented time exposed weaknesses in organizations and demonstrated that historically siloed approaches to resiliency put organizations in grave danger. No one had a plan robust enough for 2020. Those that emerged from this year stronger were those that took an agile, collaborative, and, above all, data-led approach to resilience.
Driven by these changes, the industry will see several trends in 2021: operational resilience that blurs the lines between multiple disciplines, real-time decision-making based on data instead of plans, industry collaboration and product suites, a new executive buyer, often in the C-suite, and regulators taking greater interest in resilience across critical industries.
Operational Resilience Goes Multi-Disciplinary
2020 prompted volatile and unpredictable market conditions. The pandemic not only demonstrated the interdependence of multiple areas of risk, but showed organizations that they must be hyper vigilant about all disciplines simultaneously and holistically. Organizations recognized they had resources and processes siloed, and that communication and coordination cross-organization is necessary to prove resilience to leadership, regulators and stakeholders. This demonstrated that solution areas (business continuity, risk management, disaster recovery, and more) with their specific expertise and training each have a role to play – and a strength to bring – in an operational resilience strategy.
As organizations recognize the importance of multiple-discipline focus, the barriers between these practices will break down and come together under operational resilience. Operational resilience will become the overarching school of thought in the industry. As a result, products and services will evolve to serve this need.
Data Instead of Plans
If 2020 demonstrated one thing, it’s that organizations simply cannot plan for everything – and instead must be ready to resolve problems as they arise. However, those that emerged most successful from disruption were those with good data at their fingertips, ensuring that leaders can make informed decisions quickly.
Gone are the days in which meticulous planning and tabletop exercises were the best approaches to resilience. In 2021, organizations will recognize the value of identifying their data and dependencies, maintaining them in software and leaning on the technology to simulate the multitude of outcomes possible. When unplanned events do arise, organizations will depend on technology to play out the plans, understand where they will fail and propose the right changes proactively.
Industry Collaboration and Product Suites
Industry collaboration is already underway and will continue into next year. As resilience continues to become a highly visible and critical business operation, the industry will realize the benefit of products that span disciplines to better deliver on organizations’ needs. As organizations break down silos between business continuity, incident and crisis management, disaster recovery and various risk disciplines to become one broader resilience practice, industry players will consolidate their respective offerings and increasingly integrate product suites for greater collaboration – and ultimately, greater resilience.
C-Suite Involvement in Risk and Resilience
In 2021, we will see resilience become a priority at every level of an organization – especially with executive leadership. Prior to this year, many companies viewed resilience as an esoteric activity focused on placating leadership and regulators. They relied on a few employees to own all resilience programs, not intimately involving themselves or their operating executives with the details. 2020 took resilience out of the back room and placed it firmly into the boardroom.
The C-suite will be increasingly committed to knowing whether their organization is ready to tackle and recover from disruptions. This means a resilience program needs to span all the appropriate departments and disciplines, speak the language of business instead of practitioners and answer the highest-level questions of readiness in a single executive experience.
Operational Resilience in Every Critical Industry
Undoubtedly, operational resilience will begin to take center stage in all critical industries. Over the past several years, the Bank of England, the Fed, and the European Central Bank among others have begun a push for regulation not only in financial resilience but in the resilience of operations for financial services. These bodies recognized the critical impact that their industry has on the wellbeing of individuals, businesses, and the economy as a whole – and are taking seriously their role in making a more resilient economy.
Other critical industries, including energy, power, agriculture and others (possibly based on the 16 critical industries defined by the department of homeland security) are similarly positioned. We expect to see regulators taking a greater interest in the organizations in these spaces, to ensure our national and global systems are resilient enough to recover from future events.
2020 was a challenging year, and many people are likely relieved it’s over. But don’t rest on your laurels. Whether it’s climate change, political unrest or even pandemics, the world is more interdependent and more exposed than ever. Ensure your organization has learned the lessons of 2020 and is first to take advantage of these trends in 2021, before it’s too late.
Five Workplace Culture Trends of 2021
5 January 2021 – 2020 – a year like no other – is responsible for driving organisational change, especially workplace culture, which has witnessed considerable upheaval over the past 10 months. Workplace culture expert, O.C. Tanner Europe, foresees that the pandemic and its fallout will accelerate further changes on a scale never before witnessed. Here are its top five workplace culture trends of 2021:
- 2021 will see a big focus on organisational culture – COVID has altered priorities. Perhaps for the first time, the importance of a thriving workplace culture has been driven home, with leaders realising that culture isn’t just about the physical perks such as the table tennis table and massage chair, but is about connecting people to purpose, accomplishment and each other. After months of remote working, furlough and general workplace flux which has caused mass anxiety and financial strain, many organisational cultures need healing and fixing. Leaders will need to find ways to bring people back together, even if it means doing this remotely , and some leaders may even need to strip everything back and re-build a more positive, connected and purpose-driven culture from the ground-up.
- How we work has changed for good – Research by the O.C. Tanner Institute found 77 per cent of employees say their workplace culture will never return to pre-Covid-19 normal. Remote working will continue well into 2021 and as employees have proven that remote working can be as efficient and productive as being in the office, many organisations will allow employees to work remotely permanently. On top of this, with many organisations having had to adapt to virtual working, many normal work processes have changed for good. Companies have already adopted new recruiting and hiring processes, including virtual interviews and even the benefits that appeal to employees right now are shifting. Rather than unlimited holidays, paid parental leave has become important. There’s also a renewed focus on mental and emotional wellbeing.
- A greater emphasis on diversity and inclusion (D&I) – Organisations can no longer remain silent on social issues. Employees expect their companies to be vocal on issues of injustice and inequity and this includes a greater emphasis on D&I. And instead of focusing on how to avoid exclusion which is an approach initially driven by legal experts to avoid litigation, the key is to concentrate on inclusivity. This means companies should look past categories such as race, gender, or sexual orientation and nurture each person as an individual. With just 44 per cent of employees saying their company’s diversity and inclusion approach feels sincere, there is a huge opportunity for organisations to improve their efforts.
- Generation Z needs to be connected to purpose – Employees in this generation are entering the workplace and more than any previous generation, they are highly connected to social issues and want to make a difference in their jobs. This generation isn’t about climbing the corporate ladder but want to feel that they belong and that their company has an inspiring and relatable purpose. In order to attract and engage Gen Z employees, companies must connect their work to purpose, practice modern leadership and focus on wellbeing.
- Real digital transformation is happening – Covid-19 has forced true digital transformation that companies may have had on their ‘to do’ lists for years. Technology has been used to connect us together and keep us working during times of social distancing and remote working, and technological innovation is not stopping any time soon. Mobile tools are more important than ever, as well as strong data security and robust internet capabilities. We will continue to see more technological developments this year, with a focus on bringing people together despite many employees still working apart.
Robert Ordever, Managing Director of O.C. Tanner Europe says, “Leaders and HR professionals need to be prepared for the challenges ahead as they tackle the fallout from the pandemic. There must be a concerted effort to heal broken and damaged workplace cultures while building on the positive developments as a result of COVID-19. Inclusive, connected and purpose-driven workplaces must be prioritised and it’s time to drive technological advancements to bring people together. 2021 needs to be a year of deliberate and positive transformation.”
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