The start-up ecosystem in Europe may soon be flooded with cash. Special purpose acquisition companies (SPACs), investment vehicles that allow companies to raise money from the public markets without listing directly, have boomed in the US in recent years and investors are now seeking to move the model further afield. SPACs have so far proved faster and more lucrative than traditional IPOs and could tempt European start-ups to sell up sooner and for larger valuations than before.
What is a SPAC?
SPACs are shell companies that raise money on public markets then use it to acquire private businesses. They are typically founded by well-known investors who announce their plans to make an acquisition in a given market. The money raised by the SPAC is then used to purchase a promising company, which effectively becomes listed as a result. The process can take just 15 weeks, compared with six months for a conventional IPO.
The practice dates back to the 1990s but has seen a resurgence in the past few years. For founders, SPACs offer a way to access the capital available in public markets while only negotiating with one investor. For investors, these so-called “blank cheque” companies offer a hedge against the risk of investing in new companies in uncertain times.
SPAC investors typically receive a warrant or partial warrant for future shares, explains Tom Britton, co-founder of London based venture capital firm Syndicate Room. “With the warrants, should the share price go up post-acquisition the investor is in the money as they are, effectively, buying at a discount.”
Last year was a banner year for SPACs in the US: 237 SPACs raised a total of $79.8bn, a 462% jump from 2019. Twenty-five of these SPACs acquired technology, media and telecommunications (TMT) companies, and raised a combined $15.3bn to do so. The biggest TMT acquisition by a SPAC was Churchill Capital’s reverse takeover of US healthcare analytics provider MultiPlan.
SPACs in Europe
Now, SPACs are looking beyond the US market for acquisition targets, with a number stating explicitly that acquiring European start-ups and private companies is their goal.
“To date, the acquisition of a European business by US SPACs is a relatively rare occurrence,” said Gary Quin, CEO of North Atlantic Acquisition Corporation, which raised $375m in an IPO. “[But] given our experience in European markets we believe investors clearly want exposure via a SPAC structure to deal flow in different geographies.”
Another SPAC, Golden Falcon Acquisition Corp, which raised $345m last year, said it intends to “focus its search on companies operating in the technology, media, telecommunications and fintech sectors that are headquartered in Europe”.
After a momentary dip in the first few months of the pandemic, start-up investment in Europe quickly bounced back to its pre-Covid-19 levels. An acceleration of digitisation stoked investor interest in the tech start-up sector, according to VC firm Atomico’s State of European Tech 2020 report.
In contrast to the days of blockbuster tech IPOs by the likes of Facebook and Uber, more recently tech start-ups have preferred to remain under private ownership. “A couple of years ago, the mantra was ‘stay private for longer,’” says Aloke Gupte, co-head of equity capital markets in EMEA at JP Morgan. “The private capital markets were very liquid. They were providing capital and nobody felt a compulsion or a need to actually go out and list.”
But that has changed as the markets’ appetite for investing in companies with healthy revenue streams has grown. “The public markets are really valuing revenue,” says Gupte, “More than anything else, people from all verticals of business are saying, ‘I need to try and […] IPO faster’.”
A flood of SPACs entering the European market will increase the temptation for start-ups to go public. “Now we’ve got this wall of money out there looking for acquisitions,” says Carlton Nelson, a corporate broker at investment bank Investec. “People might be selling for larger multiples and potentially selling earlier.”
This flood of capital could lead to some overvaluations, says Nelson, but for disruptive tech companies with good growth prospects “the stars are aligning”.