Saturday, September 23rd 2023

SPAC’s : Down but not out

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SPAC’s : Down but not out


“…But investors prepared to exercise due diligence, and looking to get in early before the market tide turns once again towards more speculative ventures, might want to have a look at the some of the UK’s smaller SPACs. It is important to note that such companies can apply for exemptions from the FCA rules requiring that SPACs list with a minimum market capitalisation of £30m…”


Here are a few companies to check out: #ARA #ELEG #TMOR #PNPL


One notable casualty of this year’s brutal shake out of speculative stocks was the boom in Special Purpose Acquisition Companies – better known as SPACs. But these intriguing investment vehicles, which make it easier for private companies to come to market, are well placed to support a recovery in the tech sector – whenever it may come.

SPACs flared brilliantly but briefly through the 2020 and 2021 boom in tech stocks. A SPAC is an enterprise that goes public with nothing but cash and the aspiration to acquire one or more private companies. Such ‘cash shells’ or ‘blank cheque vehicles’ offer opportunities for companies seeking capital to secure investment without having to go through the arduous IPO process. According to Financial Conduct Authority (FCA) rules SPACs are expected to complete a significant acquisition within 24 months of listing (although as discussed below this can be extended on application). Once an acquisition is made SPACs change their name and listing code, and evolve into conventional listed companies, valued thereafter according to the performance of the business in which they have invested.

In effect, a SPAC might be described as a vehicle for a blind reverse takeover, a curious mechanism that on first inspection brings to mind the perhaps apocryphal venture launched during the 18th-century South Sea Bubble ‘for carrying on an undertaking of great advantage, but nobody to know what it is’. But the framework offers a pragmatic and ingenious means for giving ordinary investors opportunities to access early stage companies that might otherwise have stayed private, disinclined or unable to commit the resources necessary to negotiate the demanding path to listing. And of course it gives those companies all the traditional advantages of going public without many of the burdens: visibility, and access to deep wells of capital.

The SPAC boom…


When the markets were surging SPACs actually became the preferred means for raising equity through 2019 to 2021 in the US, raising $163bn, a tenfold increase. They were popular across Europe too, being used as investment vehicles by fashion billionaires Bernard Arnault (who runs luxury goods group LVMH) and François Pinault, and by former European bank bosses including Jean Pierre Mustier, Sergio Ermotti, Tidjane Thiam and Martin Blessing.

The UK Listings Review, commissioned in 2019 by then Chancellor Rishi Sunak to examine how to make London markets more attractive, was intended in large part to make London’s exchanges more accommodating to SPACs. The review, overseen by Lord Hill of Oareford, sought to address concerns that UK markets were falling behind: the LSE has been chosen for only 5pc of IPOs in the past five years, and the number of companies listed in the UK has fallen by some two-fifths since 2008. With tech companies powering international markets it was feared the LSE was in danger of becoming a backwater for ‘old economy’ energy, consumer and industrial stocks.

The FCA implemented the Review’s recommendations last year, which included opening the LSE main market to dual class share structures and reducing the free float requirement – the proportion of a company’s shares that are publicly traded – from 25pc to 15pc.  And there was a volley of new rules specific to SPACs. Liberalisation included reducing the minimum amount larger SPACs have to raise at IPO from £200m to £100m, and giving all SPACs more time to conclude deals where transactions are well advanced: the two-year time-limited operating period can be extended by six months, and by a year with shareholder approval. Other measures were designed to give investors greater protection, including new requirements for a ‘redemption’ option to allow shareholders to exit a SPAC before any acquisition being completed, shareholder approval for proposed acquisitions, and guarantees for the ring-fencing of money raised from retail investors.

…and bust


The new measures came into force last August: unfortunately, just as the SPAC bubble was bursting. SPACs have raised $12.7bn this year, a fraction of the $166bn accumulated in 2021, and just over 50 deals have been completed, down from 226. The 14 UK companies that went public via a SPAC listing across the world’s exchanges have lost nearly two-thirds of their value. The electric vehicle company Arrival has lost 93pc of its value and online used car retailer Cazoo plunged 92pc. Despite the FCA’s reforms, only one of the 14 has merged with a UK-listed SPAC, newspaper publisher JPI Media, since rebranded as National World. The picture is the same across Europe. Of the 66 Spacs that have listed on European markets since the start of 2020, just 13 have found a company to merge with, one SPAC adviser commenting that the ‘SPAC market in Europe seemed to go from 0 to 100mph and then back to 10mph within the space of 15 months.’ 

The US SPAC juggernaut has also come off the tracks, railroaded by concerns that current Securities and Exchange Commission (SEC) regulations make it too easy for special acquisition vehicles to bypass traditional disclosure requirements and present investors with misleading projections for future revenue. Virgin Atlantic, for example, which went public through a merger with a SPAC vehicle, had projected 2021 revenues of $210m in its investor presentation, the actual figure turning out at $3.3m. AppHarvest, an agritech company backed by Martha Stewart, projected 2021 revenues of $25m but secured just $9m. Electric vehicle start-ups Lucid Motors and Nikola have also been scrutinised by regulators. The SEC is considering proposals to remove the legal protections US SPACs currently enjoy regarding revenue projections. 

But though a freewheeling attitude to disclosure requirements hasn’t helped their cause, the primary driver for the SPAC downturn is the big tech sell-off: the market’s turn from the speculative ventures with which special acquisition vehicles are so closely associated. New regulations will help clear the air, but a SPAC revival will ultimately depend on a shift in investor sentiment back towards growth stocks.

Right now, of course, the outlook for the world’s markets remains highly uncertain. Financial Times columnist Robert Armstrong offers a useful overview of sentiment through the first half of the year, during which commodities and defensive stocks (utilities, staples, healthcare) massively outperformed tech and other ‘risky’ assets. The picture is more complex than value ‘good’ and growth ‘bad’ though: as the market has become more concerned about recession over the past month or two rather than inflation, value stocks have started to stutter – cheaper shares tend to do well when economies are coming out of a recession, not when there are fears that they may be entering one. As central banks tighten monetary policy, and leading indicators of economic activity worsen, Armstrong reckons there are few signs of ‘bottomed-out sentiment’ regarding the valuation of equities. 

MoneyWeek editor Merryn Somerset-Webb suggests that the present uncertainty is in large part due to recognition that there is no obvious way forward for policymakers: conventional economic levers don’t really help with today’s incipient stagflation – rising prices and slowing growth. The obvious comparison is with the 1970s, when, Somerset-Webb notes ‘Supply crunches meant it didn’t take much for rising demand to cause inflation but fall-offs in demand quickly led to recession – which led to the too-fast loosening of monetary policy and then more inflation.’ Back then policymakers kept applying the accelerator and the brakes by turn, fearful of applying the shock therapy that would ultimately bring inflation under control: recession. The harsh medicine of high interest rates was finally served by the Thatcher and Reagan governments, with all of the attendant economic and political fallout for which those administrations are still remembered. Today’s policymakers continue to seek a ‘soft landing’.

Positioning for a tech revival


But despite all of the uncertainty some investors are already beginning to rebuild their tech holdings. There is a clear and compelling case for clean energy stocks: green tech has done relatively well this year, Putin’s uncompromising belligerence highlighting the world’s need to move rapidly beyond dependence on Russian fossil fuels. But there are some signs of green shoots for rather more speculative tech. Institutional and private investors sunk $1.5bn into Cathie Wood’s volatile ARKK ETF in the first half of the year, which earned sensational returns through the tech boom, soaring 150pc in 2020 before crashing spectacularly: the fund has plunged by more than 70pc since hitting its all-time high last February. It would seem though that investors seeking a bargain are returning in anticipation of a change in sentiment. Many others have never left: Baillie Gifford’s tech-heavy Scottish Mortgage Trust (SMT), for example, which was hammered earlier this year, is still one of the UK’s most popular funds.

And when tech does come good again – as the core market principle of mean reversion suggests it must – a more mature SPAC market should be in a good position to help facilitate the sector’s resurgence. Analysts believe the SPAC vehicle, refined through recent and ongoing reform, is here to stay. As one banker put it, ‘there were too many SPACs and they really piled into the speculative part of the market … What will emerge out of that is a significantly smaller but healthy market’. The new regulations won’t be able to take risk out of the game completely. As the FCA’s guidelines put it ‘SPACs continue to have risks and remain a more complex investment, which investors should ensure they can adequately assess and understand before investing. This includes understanding their capital structure, such as the risk of conflicts of interest, dilution from shares allocated to sponsors, and assessing the potential value and return prospects of any proposed acquisition target.’

But investors prepared to exercise due diligence, and looking to get in early before the market tide turns once again towards more speculative ventures, might want to have a look at the some of the UK’s smaller SPACs. It is important to note that such companies can apply for exemptions from the FCA rules referred to above requiring that SPACs list with a minimum market capitalisation of £30m. Here are a few companies to check out:

Aura Renewables


Aura Renewables (LON:ARA) takes its name from the Greek goddess of the wind, but the company is also open to prospects in the ‘solar, biomass, hydropower, carbon capture, waste management, smart grids and green hydrogen supply chain, and their sub-sectors, ranging from raw materials resourcing to power generation, energy storage and recycling’.

Speaking to TMS founder shareholder Suresh Withana said the company was engaged in a global search and may take on multiple assets, with interests in ‘several different types of companies or … minority interests in several companies so that we are actually acting as a platform of ownership interests in a variety of technologies or businesses in the renewable energy space.’ ARA is probably looking ‘for companies that are relatively mature in the sense that they are already pre-existing businesses that are typically in private hands that are now looking for a way in which to access capital markets.’ Withana describes ARA as a blank slate, with longer term ambitions to develop a company to a market cap of ‘about £300m, half a billion or higher’, an established ‘well traded, well covered and liquid stock.’

Electric Guitar


After raising more than £1m on joining the LSE main market earlier this year, special acquisition venture Electric Guitar (LON:ELEG) is on the lookout for ambitious enterprises with the imagination to take advantage of a fast changing digital marketing sector.

The team, led by CEO John Regan, want to use Electric’s capital and their accumulated expertise to supercharge the development of companies with the potential to take advantage of a marketing industry moving through a paradigm shift, as a host of new digital technologies offering novel ways to connect with target audiences reach maturity. The company’s communications look ahead to a new world of ’360 degree data intelligence’ taking advantage of ‘in store, offline, online, in app, AR (augmented reality) and metaverse’ innovations that will allow ‘tailored, connected experiences, designed to immerse consumers in a brand’. 

ELEG has entered into formal conversations with ‘a big long list of businesses’, and has established connections with ‘a virtual team of industry talent who are all waiting to join us when the time is right’. The team’s primary challenge is to set out a compelling case to companies on their radar, and to retail investors unfamiliar with the complex dynamics of the digital marketing sector.

More Acquisitions


More Acquisitions (LON:TMOR) has a broad remit, seeking to invest in ‘a business or businesses which are developing and/or supporting the energy transition, which is the global energy sector’s shift from fossil-based systems of energy to renewable sources, such as wind and solar and lithium-ion batteries.’

TMOR wants to play ‘an active role in the optimisation of strategy and execution’ of whichever companies it backs, providing ‘capital to support significant, credible, growth initiatives.’ The company is led by Roderick McIllree, a senior mining executive with 25 years of knowledge in M&A, project generation, project management and Finance. He was the Founding Managing Director of Greenland Minerals & Energy Ltd which defined the giant Kvanefjeld deposit in south Greenland. 

Pineapple Power


Pineapple Power Corporation (LON:PNPL) listed in late 2020, raising gross proceeds of £1.3m with ‘the intention to acquire renewable or clean energy technology companies and to finance, develop and promote these environmentally sound projects internationally’. PNPL was founded by major shareholder Clive de Larrabeiti, a finance and public equity markets veteran who serves as Corporate Finance Advisor.

The company is well positioned to take advantage of the green energy megatrend, having already come close to bringing one such enterprise to market. PNPL is ‘one of a very limited number of special purpose vehicles able to conduct future reverse takeover transactions on the London Stock Exchange with valuations of less than £30m’, and will therefore, following a reverse takeover, be eligible to re-list with a market capitalisation of £0.7m or more provided that it does so within the specified timeframe negotiated with regulators. The company has performed exceptionally well since listing and is currently sat 50pc above its listing price.