The blank-cheque company boom on Wall Street is unlikely to be replicated in the City, according to an executive at the UK’s top financial watchdog, even as it consults on liberalising rules for special purpose acquisition companies.
Spacs are likely to remain a “relatively minor part of the overall listed market”, the Financial Conduct Authority’s director of market oversight, Clare Cole, told Financial News.
European exchanges are battling to gain an edge over rivals as the explosion of Spac initial public offerings in the US starts to move across the pond. London has lagged other locations including Amsterdam and Frankfurt, which have attracted the handful of banner European Spacs to list this year.
“It’s unlikely we will see the level of growth we have seen in the US,” Cole said. “Spacs will be a relatively minor part of our overall listed market. I’m not expecting to see that volume of growth in the same way.”
Spacs raise money on public markets to fund acquisitions at a later date, usually within two years. It is seen as a faster route to public markets than the traditional initial public offering process.
“These are vehicles people should only be investing in with a clear understanding of the risks”
There have been 318 Spac IPOs in the US this year worth $101bn, according to data provider Dealogic, which has already exceeded annual records. They have received celebrity backing from everyone from musicians to professional athletes, including rapper Jay-Z, tennis icon Serena Williams, and former basketball player Shaquille O’Neal.
In Europe, it’s a much smaller scene — with 21 deals worth $6bn.
The FCA is currently reviewing the rules surrounding Spacs in the UK, following recommendations by former European Commissioner for financial stability, financial services and capital markets union Lord Hill that there should be some liberalisation.
Under current UK rules, a Spac listing is typically suspended at the point it identifies an acquisition target. The FCA is weighing up rolling back the requirement to suspend listing for some Spacs, and consider setting a minimum amount of £200m to be raised when a Spac’s shares are initially listed.
“There are a number of Spacs in London at the moment with this particular requirement we had seen as an important investor protection measure, which was having an impact on the number of Spacs, and particularly high-quality Spacs in London,” said Cole.
“What we were trying to do with our rules was balance choice for investors and better clarity for issuers with strong investor protection measures.”
“It is never a good idea to invest in a Spac just because someone famous sponsors or invests in it ”
The UK rules were put in place because a number of historical Spacs to list in London were small, and deemed risky to investors.
The regulator estimated that there are 33 Spacs listed in the UK. Of the roughly 20 Spacs with live listings, only two have a size exceeding £100m in market capitalisation, and two thirds are worth around £5m or less.
A number UK-listed Spacs “just may not be appropriate for the majority of retail investors”, Cole said, raising particular concerns about the quality of Spacs with low levels of assets.
“One of the things we have noticed about the development of the UK is we are seeing in the standard listing in the UK a number of very small, low-quality Spacs,” she said. “It’s an area we are particularly focused on. We are planning a second consultation — launched in the early summer — looking directly at addressing some of those concerns.”
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