Why London should resist the Spac craze

Rarely has a single investment trend attracted such a widely disparate band of promoters. The mania for special purpose acquisition companies, which transformed capital markets last year, has already swept up sports coaches, former US politicians and ex-investment bankers.

The latest crop of disciples features a former magazine editor and the co-owner of an ice hockey team. Even Adam Neumann, the ousted chief executive of troubled WeWork, could finally see his company listed on the public markets thanks to a Spac.

Blank cheque companies raise money through a public listing with the promise of finding a lucrative investment target. They raised close to $80bn in the US last year and demand this year has accelerated further; so far 161 Spacs have launched in the US, raising $47.2bn and eclipsing the $42bn raised through traditional initial public offerings.

So it is no surprise that in the UK, where regulators are reviewing listing rules to help shore up London’s post-Brexit position as a global financial centre, pressure is growing for it to embrace the Spac revolution. The City faces competition from Amsterdam, which has already picked up some of London’s share and derivatives trading. Xavier Rolet, the former chief executive of the London Stock Exchange, is among those urging the UK capital to open its doors to blank cheque companies.

UK listing rules mean a Spac may have to suspend trading in its shares when a deal is announced, which has been widely seen as discouraging Spac listings. Spac investors who do not support the takeover, and wish to sell their shares, can have their money locked up for some time.

Fans of Spacs argue they serve a useful purpose. With public markets shrinking, the surge in listings offers a means of channelling large volumes of ready growth capital into the economy. In addition, at a time when many asset managers are sitting on large sums of cash earning ultra-low interest rates, Spacs promise a higher return, theoretically without much extra risk, at least pre-deal. They also offer investors the benefit of speed — they do not have to comply with all the rules that govern traditional flotations. Listing fees are also low until a deal is found.

But there are significant risks — which regulators in the UK should consider before jumping on the bandwagon. The sheer number of Spacs has already sparked concerns they now in themselves constitute an asset bubble. The boom might fizzle out once interest rates start to rise.

A Financial Times analysis last summer showed that the majority of Spacs arranged between 2015 and 2019 were trading below the $10 standard Spac listing price. And while there is little risk to the financial system if the bubble pops, the reality is that retail investors who backed the less sensible schemes will be the ones who get most badly burnt.

The structures of Spacs also need to change. Most are currently skewed in favour of their sponsors. A recent academic paper laid bare the embedded costs. Some high-profile backers have promised fairer deals for retail punters. One fundamental selling point is also an intractable problem: Spacs exist in part to skirt the normal IPO disclosure requirements that are themselves designed to protect investors’ interests.

UK regulators should tread carefully before changing listing rules to allow a rush of Spacs to London. A comprehensive approach that considers financial rules in the round is needed to ensure the City retains its appeal. Spacs may be today’s hot fashion but they are not new and few are likely to prove enduringly special.