Proposals to loosen rules on public offerings bring risk as well as rewards
Thursday 11 Mar 2021 Author: Ian Conway

There has been much discussion of SPACs, or Special Purpose Acquisition Companies, in recent months, but they aren’t a new concept by any means.

Back in the 1980s SPACs were known as cash shells, a time and money-saving way for firms to list quickly. They typically came with boards full of highly experienced businesspeople, good institutional contacts, and a boat load of cash.

Also, they typically traded at a significant premium to their cash value soon after listing as investors anticipated them finding an inspired acquisition, making everyone fabulously wealthy in the process.

Until a few years ago, UK cash shells favoured the looser regulation of the AIM market. That was until AIM effectively shut the door following the Gate Ventures debacle in 2015, where the company descended into madness within a year of listing and shareholders lost everything.

However, if the Financial Conduct Authority adopts Lord Hill’s proposals to loosen the rules on London listings, there could be a flood of new SPAC offerings coming to the UK stock market because more companies might be willing to use them as a way of listing their shares.

SPACs couldn’t be more ‘now’ – sporting stars Shaquille O’Neal and Colin Kaepernick each have one, and even musician Jay-Z is involved with a SPAC. Yet this type of investment vehicle goes back three centuries to the South Sea Bubble, one of the greatest examples of stock market mania in history.

Then, as now, investors must trust that management a) knows what it’s doing and b) doesn’t overpay for assets. Yet managers are typically paid a fee of up to 20% based on the value of their assets, not their performance, so what price due diligence?

SPACs typically aim to acquire all or most of a company and to control or operate it. They are free to load up with debt, increasing their firepower as well as the risk to shareholders’ funds. They also don’t need to appoint reporting accountants.

In the past, it paid to buy a SPAC when it joined the stock market and sell it a few months later when the valuation had exploded and it had yet to buy anything, so capturing the ‘hope value’.

Three hundred years ago, one SPAC was launched ‘for carrying on an undertaking of great advantage, but no-one to know what it is’, according to its prospectus.

At that time, many SPACs rose to 10 times their value as speculation ran wild, yet all eventually went to zero. It’s worth remembering the words of philosopher George Santayana, who said: ‘Those who cannot remember the past are condemned to repeat it.’

‹ Previous2021-03-11Next ›