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The Recent Resurgence of UK SPACS and Latest Trends

The Recent Resurgence of UK SPACS and Latest Trends

By Paul Amiss, Partner, Winston & Strawn LLP

Introduction

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 ?

Paul Amiss

Paul Amiss

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:

Requirement Standard Listing AIM
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.

Acquisition Process

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.

Conclusion

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.

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Two-thirds of finance professionals are now more efficient due to the Covid-19 crisis

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Two-thirds of finance professionals are now more efficient due to the Covid-19 crisis 1

The Covid-19 crisis is making a big impact on the efficiency of the UK’s finance departments, with 66% of financial professionals reporting that they are working more efficiently since the onset of the pandemic in March of this year. The results from a recent survey into the impact of the pandemic on the sector by fintech company Onguard revealed that this increased efficiency is primarily due to the obligation to work from home and rapid digitisation during this period.

Changing attitudes to digital transformation

71% of financial professionals agree that their department was able to rapidly adjust to home working within just a few days, with 21% reporting that their organisation has invested in specialist software in order to do so. This has resulted in just under three quarters of those surveyed believing that they are able to perform their work well from home, with only 35% still in need of specialist software to collaborative effectively.

Alongside the implementation of new technology, changing attitudes to digital transformation have played a role in the successful move to remote working. Research conducted earlier this year prior to the Covid-19 outbreak in the UK highlighted employees’ resistance to digital transformation as a major challenge, however now only 11% of organisations view employee attitudes as a barrier to change.

Working from home is the new norm

Looking ahead, 61% of financial professionals would like the flexibility to keep working from home permanently, thanks to the benefits provided by new technology.

Marieke Saeij, CEO of Onguard: “It is certainly admirable how English businesses have adapted during the Covid-19 pandemic. Pre-pandemic, digital transformation initiatives within many organisations was a multi-year plan, but the events of this year meant that businesses could not wait to implement further strategies. Almost exclusively, colleagues now update each other digitally. Because of this, its crucial that organisations have the right software in place to keep everything running effectively.

Due to the challenge of finance professionals communicating via digital tools, it is important that data is kept up-to-date and contains real-time insights so professionals can make the correct remote decisions in an efficient and collaborative way. With the help of the right software, the finance professional can be sure they always have the correct data to do their job and assist both the organisation and customer moving forward.”

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Two thirds of people believe their work travel patterns have changed permanently

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Two thirds of people believe their work travel patterns have changed permanently 2

Alphabet research shows accelerating demand for mobility and EVs after lockdown

  • Only 35% of people expect to return to normal travel habits
  • A quarter of consumers said their next vehicle would be electric
  • 55% of consumers think all delivery vans should be electric, and one in three would pay extra to guarantee it

Farnborough, UK – 29 September 2020: Alphabet (GB) today published a new report examining how the pandemic has accelerated changes to travel and transport, altering consumer and business travel habits in UK cities.

Changing travel patterns

With mass migration to working from home, in March, road traffic travel dropped to levels not seen since 1955[1] and journeys on the London Underground fell by 95%[2]. Today, only 6% of those travelling to work by train feel comfortable, dropping to just 4% for tube users.

Use of more active modes of transport like cycling and walking have more than doubled to 20% and 10% respectively. A quarter of 18-44-year olds expect to retain the new modes of travel they used during lockdown, and only one in three expects a return to normal travel patterns.

Private vehicle preference

As such, the company car may also see a surge in popularity. Alphabet’s research showed 37% of consumers would now consider using a company car following the pandemic, to enable them to travel safely, whereas prior to lockdown many employees favoured a cash benefit. These changes are likely to remain for some time due to ongoing safety concerns and fleet managers will need to have a flexible fleet offering to handle these changing preferences when building their future mobility plans.

Electric Drive

The improvements in city air quality during lockdown appear to have had an impact on public perception and sales of electric vehicles (EV). Adoption of EVs continued to accelerate during the pandemic, taking a record market share of new vehicle registrations in August. Nearly a quarter (24%) of consumers said an EV or plug-in hybrid vehicle (PHEV) would be their next choice and 40% would strongly consider one. This is a substantial increase from the 19% of people considering EVs at the end of 2019[3].

People also want to see businesses supporting the shift to EVs and are prepared to pay for it. Over half (55%) of respondents felt delivery vans should be electric, while one in three said they would be happy to pay extra for an electric delivery vehicle. Fleets that make the shift early have the opportunity to benefit significantly in terms of brand perception and preference.

Simon Swan, Director Future Mobility, Arcadis said: “Due to the impact of COVID-19, all sales of vehicles took a major hit; however, electric vehicles were affected less than other vehicle types. As the UK emerges from lockdown, electric vehicle registrations continue to rise in absolute numbers with August new car registrations figures showing a record market share for pure electric cars. Analysts were expecting EV sales to hit 10% of new car registrations in 2022, not 2020. Hitting 9.7% in August is a big deal for the UK market.”

Alan McCleave, UK General Manager, NewMotion said: “As adoption spreads and we embrace electric vehicles – especially in the commercial sector – we need a much more robust smart charging infrastructure. Fleet managers need to feel confident that powering their plug-in vehicles will be as simple and reliable as it is for traditional vehicles. Introducing interoperability, so a single payment solution works across all charging networks, is a large and necessary change. With a focus on electrification, and the infrastructure to support it, fleets will be a central part of the national recovery from COVID-19 and our path to a greener economy.”

Nick Brownrigg, Chief Executive Officer, Alphabet (GB) said: “The pandemic has had a huge impact on people and businesses, fundamentally changing how we move around and use our cities. While we can’t be sure of the long-term impact, it’s clear a lot of these changes are here to stay, and for fleet managers flexibility becomes ever more important. At Alphabet, we are working closely with all our customers to help them navigate the new world. People are adopting new habits and behaviours so it’s key that digitalisation and sustainability are central to any fleet strategy. Now is the time for all of us to invest and meet the changing needs of employees and customers, so we can ensure everyone feels safe and confident when travelling to work.”

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Death of the workplace friendship: study shows how remote working is eroding our meaningful connections with colleagues

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Death of the workplace friendship: study shows how remote working is eroding our meaningful connections with colleagues 3
  • Employee experience platform Perkbox’s research on 1,296 employees and 300 business leaders reveal 65% think the ‘new way of working’ will take its toll on workplace friendships
  • 45% of employees say that maintaining emotional wellbeing still remains one of the biggest remote working challenges; yet only 20% of bosses agree

  • Meanwhile 35% of business leaders confess they are struggling to cope with the pressures of keeping employees happy at the risk of their own personal wellbeing

Friendships at work have long been a debated topic pre-COVID: arguments either side profess these to be both conducive or a hindrance to productivity and creativity. Yet, according to new research into the national state of employee wellbeing conducted by employee experience platform Perkbox, 45% of 1,296 respondents say that maintaining emotional wellbeing still remains one of the biggest remote working challenges facing businesses, with 65% believing that workplace friendships – now even more critical in the ‘new working world’ – are suffering because of remote working.

Colleague camaraderie in the age of COVID

The benchmarking study saw that 54% of employees now believe that maintaining ‘social wellbeing’ (how connected we feel with our colleagues and the wider world) presents one of the biggest wellbeing challenges in light of remote working – an increase of 18% from Perkbox’s study of the same sample set the previous month.

Yet there is a clear disconnect between what employees feel and what their employers believe: only 12% of business leaders recognise their employees’ social wellbeing as a significant challenge in the age of remote working, and only 20% of bosses (compared with 45% of employees) believe that maintaining ‘emotional wellbeing’ (how we feel about stress, anxiety and our overall mental health) is a significant challenge that mustbe addressed.

Some employers, however, confess that they are struggling with the pressures of keeping their employees happy, safe and productive during this ‘new normal’, with 35% saying that this has been at the cost of looking after their own personal wellbeing.

Mona Akiki, VP of People, Perkbox, commented: “Many organisations pre-COVID either didn’t pay much attention to friendships at work or focused on it as a way to ensure that it didn’t create any conflicts within the organisation. Today, we’re realising that strong colleague interactions seem to matter to an employee’s social and emotional wellbeing.

Remote working appears to have created nervousness around our sense of connectivity and camaraderie with our colleagues. Forward thinking organisations are quickly realising that this should matter to them as well.

Although organisations didn’t necessarily cause the current climate, the increased sense of anxiety and burnout amongst their employees who are now living and working in silo at home will not only impact the individual’s health but also the wellbeing of the team and the business. Both employees and employers must work together to combat this challenge and achieve wellbeing before it becomes an even bigger issue.”

Sedentary and sad

The third instalment of Perkbox’s benchmarking study also showed, for the first time, how physical health due to less movement has risen to be one of the top three wellbeing challenges for employees (after social and emotional wellbeing). With the removal of the daily commute and longer hours spent at the computer in order to appear more productive and thus more indispensable, 37% of employees believe that their physical wellbeing has suffered – with lack of exercise fuelling the emotional crutch of unhealthy comforts such as takeaways, binge watching and excessive drinking. The government’s recent guidance to “work from home, if you can” could exacerbate the problem further.

Tackling the problem 

Before and during the earlier months of COVID-19, workspace wellbeing (how the safety of our work environment and / or ability to work well from home is affecting us) was the most implemented initiative by 79% of businesses, with initiatives around social wellbeing coming a close second (75%). Yet – perhaps because of the economic uncertainty brought about by COVID compounded by the lack of acknowledgement by bosses that emotional and social wellbeing is a problem felt by employees – 16% of small business say they have no plans to implement initiatives to tackle these challenges; a figure which has doubled from the previous Perkbox study.

Furthermore, 30% of smaller business have no plans to implement financial wellbeing support during this critical period (compared to 9% in the last study); 23% have no plans to implement physical wellbeing initiatives (an increase from 9% previously), and 13% have no plans to implement emotional wellbeing initiatives to support employees’ mental health (compared to 5% previously).

“There is a concerning trend – especially among smaller businesses – about disinvesting in overall employee wellbeing initiatives at a time where support is needed the most,” commented Mona Akiki, Perkbox.

“There seems to be a lack of understanding that these initiatives need not be expensive but considered, human-centric and empathetic to the emotional, social, physical and financial challenges that beset us every day, hindering us from our ability to perform optimally. A team whose wellbeing has been adequately attended to has the resilience, energy and creativity to weather business challenges more effectively than a team whose members are emotionally, physically and socially run ragged. Our research acts as a barometer for how pressing these concerns are to both employees and employers. These challenges, at least for the medium term, are here to stay. It’s time that businesses invest in employee wellbeing as part of a wider essential strategy to ‘keep the lights on’ where others are floundering.”

As part of Perkbox’s New Working World series, a number of surveys and reports are being produced to track employee sentiment towards wellbeing as we exit a post-Covid world. This is being run alongside a survey of UK employers to see the business perspective on wellbeing impact in light of 2020’s events. For more information and full report on the studies findings, visit: https://www.perkbox.com/uk/resources/library/new-working-world

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