What does the future hold for European SPACs?

European markets are easing the path to public markets to lure more PE funds and their portfolio companies as SPACs become more mainstream.

The special purpose acquisition company boom in the US is slowly making its way to the European markets.

In the first seven weeks of this year, two SPACs raised $635.4 million in Europe, a figure 30 percent larger than the full-year amount for 2019, according to data from Refinitiv.

The European SPAC market could develop significantly this year, Luca Erpici, European head of equity syndicate at investment bank Jefferies, told Private Equity International, an affiliate publication of Venture Capital Journal.

“We are now seeing significant interest in raising European-listed SPACs with the same features of US SPACs and we are mandated on a number of European SPACs,” Erpici said. He noted that the bank has seen SPACs pricing in Amsterdam, Paris and Frankfurt, and that such vehicles in the Nordic region will also gain traction.

The US SPAC craze became the dominant trend of last year, with 244 vehicles raising $78.2 billion, according to Refinitiv. It is expected to continue in 2021. US SPACs have already raised roughly $60 billion as of the end of February, with an increasing number of SPACs looking at global and European targets.

Dutch courage

Amsterdam may become the natural venue for issuers looking at pan-European targets, Erpici said. This is helped by its capital market-friendly reputation and similar listing rules like that of the US that allow investors to pull their money before or after the merger target is announced, he added.

French asset manager Tikehau Capital launched a SPAC in February that listed on Euronext Amsterdam. The SPAC, called Pegasus Europe, is backed by Financière Agache, the holding company of luxury goods group billionaire Bernard Arnault and will acquire financial services companies in the region.

The Dutch capital is already benefiting from the UK’s exit from the EU. Amsterdam overtook London as Europe’s largest share trading center in the region, “following a successful transition of activity in EU-listed securities post-Brexit,” according to Cboe Europe, which runs a Dutch exchange.

London calling

The UK has been losing out on rival hubs New York and Amsterdam for tech IPOs and SPACs listings. In January, London Stock Exchange chief executive David Schwimmer told Reuters that Britain should “replicate New York’s blank check listings to boost London’s appeal as a global financial center after Brexit.”

The main impediment is that London’s rules do not come with an opt out, which means SPAC sponsors in the UK cannot redeem their shares if they decide to not invest in the underlying target. Some investors will not be able to participate under the current framework and that is limiting appetite for UK-listed SPACs.

There are likely to be some changes to the SPAC regime in the UK driven by the pressure, post-Brexit, to stay competitive as a market, particularly within Europe, said Eleanor Shanks, a partner at Sidley Austin. “We do need to make sure that the London market, which is already having some issues on the trading side, remains competitive as a place to IPO. There will be a determination not to slip.”

A review of UK listing regulations was released alongside the UK Budget on March 3. The key recommendations include modernizing listing rules to allow dual class share structures in the LSE’s premium listing segment and reducing free float requirements – the amount of a company’s shares that are in public hands – from 25 percent to 15 percent and allow companies to use other measures to demonstrate liquidity. The UK government is examining the recommendations and will set out next steps by year end.

Many in the industry are hopeful the conclusion of the review will bring about changes in the SPAC regime. Shanks said that with more institutional players involved in SPACs, more scrutiny on the assets will follow.

Competition intensifies

Bain & Co’s Global Private Equity Report 2021 estimates that nearly half of the $83 billion raised for SPACs last year according to SPAC Insider research will pursue the same targets as buyout funds.

“Whether this is something that invites a lot more regulation because there are problems with it, or whether it becomes a viable fundraising strategy that will really have legs and be a material part of the market going forward will hinge on performance,” said Hugh MacArthur, global head of private equity at Bain & Co.

There is a lot of money being raised for SPACs, and the companies that they buy need to make sense, he added.

“The quality of asset selection, the ability to do quality deals and to make that value play out in the public market is going to determine whether this is a bubble.”

Erpici of Jefferies believes that private equity and alternative asset manager SPACs will represent a bigger proportion of SPAC issuance going forward. These accounted for 20 percent of SPAC issuance in 2019, 50 percent in 2020 and over 55 percent thus far in 2021.

Best fits

The sectors that are poised to benefit from European PE-backed SPACs are technology, life sciences, and financial services and insurance, according to Fatema Orjela, a partner at Sidley Austin. She noted that tech investors in a way are more used to this kind of fundraising round with multiple stages of funding with limited protection and limited rights.

“A SPAC can offer the opportunity to bridge the gap between these fast-growing businesses and such businesses getting to IPO. We’ve seen a bit of a rise in ‘unicorn’ tech companies listing with relatively little financial substance behind them compared to the listed companies of the past. And despite all of the negative commentary that comes with each of these IPOs, they end up often being fine.”

There is a need for life sciences funding, while a lot of consolidation is happening within the insurance and financial services industry, she added.

“A SPAC would be an excellent vehicle to have the right sponsors who are used to running regulated service business, sitting in the sea and then scanning the market for what businesses they could acquire to roll up.”