European financial centres are competing to benefit from rapid growth in SPAC investment vehicles on this side of the Atlantic after they came under regulatory fire in the United States. The Netherland’s Euronext leads in numbers, but Luxembourg attracts those with particular tax needs.
The sudden growth of the SPAC (Special Purpose Acquisition Company) market in these two financial centres was the focus of a recent webinar organised by Real Deals, in association with IQ-EQ. Real Deals has described SPACs as “one of the hottest market trends in the private equity space”.
In the first quarter of 2021, SPACs raised nearly US$100bn from IPOs, surpassing the figure for all of 2020, according to financial data from provider Refinitiv.
No commercial operations
A SPAC is a company with no commercial operations formed solely to raise capital through a public offering of the SPAC’s equity security. With the capital raised held in an escrow account, the SPAC seeks to acquire an existing privately-held company. The SPAC typically has two years to make an acquisition. If it negotiates a formal merger with its target, it enters the so-called “de-SPAC” phase.
However, the original US-based SPAC boom is cooling off, commented Pascal Rapallino, group investment structuring leader at IQ-EQ. “The SEC (Securities and Exchange Commission, the federal financial regulator) has issued cautionary statements on SPACs, on financial reporting and audit considerations, as well as on the rise of over-valued targets in the de-SPAC process.”
However, he was quick to point out that his US-based colleagues fully expect the US market to start “booming again”.
SPACs in Europe
About 30 SPACs have been listed so far in Europe this year, according to Emma Causevic, Director Corporates at IQ-EQ. “Euronext Amsterdam has taken an early lead in SPACs, with over 40% of European SPAC listings,” she said. Her area of expertise at the investor services group is providing corporate administration services and governance services to SPACs.
Since the start of the European SPAC “boom”, the Dutch financial centre has put a lot of time into becoming a place companies would choose to list their SPACS, according to Annefleur van Oel, an associate on NautaDutilh’s capital markets team. They worked out and set up “the whole mechanics of the SPAC”, she explained, “with all of the parties involved such as Euronext, the AFM, Euroclear, all the agency banks.” Van Oel has worked on some major European SPAC deals with Causevic.
Luxembourg also sees growth
“There have been a fair amount of transactions actually originated in Luxembourg and of SPAC vehicles being incorporated in Luxembourg, according to Arnaud Delestienne, director of international capital markets as well as member of the executive committee at the Luxembourg Stock Exchange. “I’d obviously love to quote the same kind of numbers,” he said.
But if Luxembourg has attracted fewer SPAC vehicles than the Netherland, its financial centre knows that its corporate law framework is “quite attractive for those transactions.”
While agreeing with his Dutch fellow panellists about the importance of having a full ecosystem to support SPAC initiatives, Delestienne felt he need to make Luxembourg’s case.
He pointed to Luxembourg’s pro-active CSSF financial sector regulator as well as his own stock exchange, and the post-trade infrastructure in Luxembourg, with Clearstream and LuxCSD. “But also, more importantly, all the market experts that are there: bankers, law firms, advisors, private equity firms and the fund community, which is very much present.”
The debate over the relative advantages of Luxembourg and the Netherlands continued until van Oel stated that “I think the main question to go for either Luxembourg or the Netherlands is mainly a tax-driven question.” Nobody disagreed.
International interest
The prospect of London becoming another SPAC hub was raised, especially following new SPAC investor-friendly rules emphasising investor protection that came into effect in August 2021.
Rapallino added that Hong Kong and Singapore have said they will try to attract new investors, with Singapore introducing new SPAC listing rules.
Admitting that he had no crystal ball on what the future holds, Delestienne of the Luxembourg stock exchange explained that he saw “room for growth in the immediate future” because “the European markets are less saturated than the US market.” While he said that SPACs are “contributing to diversifying and facilitating access to capital markets,” SPACS come with inherent risks that must be mitigated, especially by regulators and market infrastructure representatives. He ended on an optimistic note: “If we do that and do it the right way, there should be bright days ahead for SPACs.”