SPACs: turbocharging IPOs
Executive Education / 21 September 2021
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Prof. Dr. Christoph Schalast lehrt Rechtswissenschaften, insbesondere Mergers & Acquisitions und Europarecht, an der Frankfurt School. Er ist zudem Mitbegründer und Direktor des Frankfurt Institute for Private Equity and M&A (FIPEMA).

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With the arrival of SPACs (Special Purpose Acquisition Companies), the German stock market is experiencing a type of IPO which we would never have anticipated – especially during a pandemic. Even so, SPACs – empty shells or off-the-shelf companies or companies without business operations – have not yet fully taken off in Germany, accounting for just four IPOs in 2021. This simply confirms the country’s relative lack of affinity for equity investment and risk, as well as a lack of systems for routinely dealing with this kind of investment. By contrast, SPACs are now firmly embedded in the USA, accounting for around 50 percent of all IPOs in 2020, even though the number declined in Q2 and critics are warning that the SPAC market is saturated.

The key: know who you’re dealing with

While European investors find SPACs attractive, the concept and approach haven’t yet caught on. Conventional IPOs involve trading in “real” companies, whereas SPACs are essentially capital aggregators, at least to start with. Lurking in the background is generally a well-known investor looking to penetrate a given industry or market – albeit with a company that doesn’t exist (yet). Here, instead of choosing a familiar business model, potential subscribers are investing in the underlying idea and plans, as well as the existing investors’ ability to implement them successfully. Even so, they do have the option of backing out of the transaction if the business appears uncertain or less than promising.

SPACs could be described as a “turbocharger for IPOs”. Whereas the conventional route to a public offering takes about a year, with a SPAC the whole process can be shortened to around three months. Investors need information on the founders and must establish which sector they intend to invest in. This makes the initiators’ expertise and network – the key factors enabling them to find the right investment target – all the more important. And this is precisely what investors rely on.

Thus dealing with SPACs is always both speculative and risky. Banks and investment companies are less vulnerable to this than small investors, who can use SPACs to take part in private-equity and venture-capital strategies – an approach traditionally reserved for institutional investors. Nevertheless, caution is called for. When investing in a SPAC rather than, for example, a Siemens share, you’re effectively buying a pig in a poke, with no certainty that there’s a pig in there – essentially, you have no idea which company you’re actually investing in. Worse still, SPACs are potentially more susceptible to fraud, due to a lack of the supervisory controls governing “normal” IPOs.

For German SMEs, SPACs are an interesting alternative

Even so, SPACs can do much more than they’re generally given credit for. They can be a financing vehicle for mid-cap companies; they can be an alternative to venture capital for startups; they can operate in the double-digit millions, and they’re compatible with German structures. They do raise a number of legal questions, however. It is possible, for example, that German corporation law is a little too hostile to SPACs and needs swift reform to remain competitive. On the other hand, it may be that German structures provide greater security, especially when it comes to corporate succession in the mid-market sector.

In view of the prevalence of low interest rates and a very active M&A market, SPACs represent an interesting option for both stock-market aspirants and corporate divestments. It remains to be seen whether they can become an established financing option alongside other alternative instruments such as private equity, private debt, mid-market bonds or synthetic funding structures.

The question here is whether the German stock market, with its somewhat restrained investment behaviour, is fertile ground for SPACs. It may well be that German investors remain sceptical. On the other hand, there is a current dearth of attractive investment targets. So: watch this space!