Eternal innovation in the financial markets
The financial markets are always changing, moving forward, evolving. They change in response to several factors including investor demand, regulatory pressure, competition and, most of all, someone, somewhere having a bright idea. There are lots of little everyday ideas, but every once in a while, someone has a big idea that catches on and starts to play a big role in activity. Over the last couple of years, special purpose acquisition companies (SPACs) can claim to have been one of these big ideas.
SPACs are probably hovering in third place behind cryptocurrencies and the blockchain as the biggest talking points in the investment markets over the last 18 months. The main reason why people aren’t talking about them more is that crypto in its various forms has dominated so much of the economic conversation.
Despite the lack of mainstream attention, according to a recent article by Forbes [LINK:https://www.forbes.com/sites/hanktucker/2021/04/06/chamath-palihapitiya-and-nine-other-new-billionaires-minted-by-spac-frenzy/?sh=4a332d86ed19] SPACs have raised US$180 billion since the beginning of 2020. The data suggests that the use of the vehicles is accelerating, with the US$87bn raised by 248 SPAC deals in 2020 already surpassed by the US$93bn raised by 300 deals so far in 2021.
What is a SPAC?
But what are they? To keep it simple, SPACs are a way of taking private companies public by raising money on an exchange through a shell company and then using the money to acquire a target company. The approach means that the target company can be floated without having to jump through the hoops associated with a traditional initial public offering (IPO).
What this means in practice is that while a traditional IPO can take around a year to get to market, a SPAC can get a company listed on an exchange in a matter of weeks. Given the challenges that the last eighteen months have presented, a rapid route to market and funding can be an attractive proposition.
Critics might raise an eyebrow at using a vehicle to bypass the traditional checks that are necessary to list a company, but one of the benefits of a SPAC is that their fund-raising actovotoes tend to be focused on professional rather than retail investors. Retail investors might miss out on the opportunity, but they also miss out on the risk.
Regulators regulating…
That said, some regulators are looking meaningfully at SPACs. The UK’s Financial Conduct Authority (FCA) announced at the end of March that it wanted to that SPACs operate within a “framework of high regulatory standards and oversight” and is expecting to have such a framework in place by early summer. Once one regulator starts making that kind of pronouncement, there is a decent chance that others will follow. Indeed, both Hong Kong and the Singapore Exchange are said to be in the process of developing a structured framework to allow SPAC listings.
But of course, other global financial centres could decide not to follow the FCA’s lead and allow SPACs to continue to raise money as they do today. If they decide to do that and the FCA, Hong Kong and the Singapore Exchange continue down the road of regulation, there is a chance that several promising companies in the UK and Asia could decide to take future listings away from their native markets and make the most of the freedoms offered elsewhere.
This risk was highlighted when UK-based Cazoo, an online platform for used car sales that has enjoyed strong performance during the lockdowns of 2020 and 2021, announced that it would merge with Ajax I, a New York-listed SPAC. The deal sees Cazoo valued at around US$7bn, more than double the US$2.6bn valuation it received in a private funding round six months earlier.
…is an opportunity and a risk
The challenge with the more laissez faire regulatory approach from this perspective is that there is a risk of someone finding a way to take undue advantage of the vehicle, circumvent the regulatory framework, suffer a collapse and damage both confidence and financial returns. There is also the widely discussed risk that the SPAC boom is a bubble waiting to burst. As it turns out, the balance of risk against opportunity works for regulators as well as investors.
It is this competitive pressure, even among regulators, that keeps the financial markets changing and moving forward. As complicated as it is, it is the reason why the financial markets are eternally evolving, and why regulators need to manage their risk appetites as much as investors.
About Marco Quacken
Marco has a passion for business development that helps projects succeed and businesses flourish. With a global network of contacts, he brings teams together, matching expertise to requirements and implementing strategies that help good ideas grow into sustainable businesses. He has experience across a range of sectors including finance, real estate, technology, advertisement, automotive, consumer goods, energy, retail, sports and telecommunications.
