SPACTOPIA: Will Africa Join the Global Party?

SPAC. An acronym which stormed into front of view in 2020, and has become synonymous with capital markets in 2021. Also known as a ‘blank cheque company’ the concept has been in existence for a few decades, but a recent resurgence in popularity has culminated in Q1 2021 witnessing the highest level of issuance activity since records began (the equity market in particular saw 1,889 issuances raising US$ 346bn in total) and fuelling the strongest start to M&A activity since the 1980s. To put it into context, 320 SPACs went public globally within Q1 of this year – 10 x more than Q1 2020.

SPACs to date have primarily found popularity amongst more mature, established capital markets; most listings have taken place in New York whilst other key global exchanges have indicated an interest to attracting these vehicles to their bourses. Within Europe, Amsterdam’s’ Euronext bourse has been a forerunner in courting SPAC listings – April’s €500mn Pegasus Europe SPAC created by LVMH CEO Bernard Arnault and former UniCredit head Jean Pierrer Mustier demonstrates this – whilst other Stock Exchanges, such as the UK’s London Stock Exchange (LSEG), have been revaluating their regulatory requirements. However, there are those out there that remain sceptical to this proliferation in listings, predicting an impending burst of the SPAC Bubble.

Image 1: Amsterdam’s Euronext is positioning itself to be a leader in Europe for SPAC listings. Last November, Dutch Start Companies Two listed on the bourse. Source: Euronext

In relation to both Emerging and Frontier Markets, SPACs still seem a ‘little way off’. Singaporean headquartered ride-hailing ‘start-up’ Grab’s recent listing on the Nasdaq (the biggest SPAC deal to date) does change this international perception and showcases the global possibilities for using SPACs to ensure international institutional capital can flow into innovative, tech enabled businesses from as far afield as South-East Asia.

But where does this leave regions like Africa? Will we start seeing businesses using SPACs as a means for attracting new capital? Can local stock exchanges provide the infrastructure to support SPAC listings? Before we explore these various questions, let us understand how a SPAC actually comes into existence.

SPAC: A Summary

SPACs, in a nutshell, are a publicly listed shell company that raise cash via an IPO, and has a set amount of time (usually 24 months) to invest it. This “blind pool” of capital has one sole purpose: acquiring a single, public-market ready operating business. The search for a potential company is led by a Sponsor, who usually brings investment and/or operational expertise in a particular industry or business sector in which the SPAC will pursue a transaction. The Sponsor will put together the management team responsible for funding, raising and executing on the SPAC and its subsequent acquisition. 

Following the successful SPAC IPO, where the shell company becomes public, the management team have 24 months to find a deal. Whilst the hunt for a transaction goes on, the cash is held in a Trust and if it is not invested within the allocated 2 year timeline then the SPAC must dissolve and return its cash to the shareholders.

On the flipside, if a suitable prospective company is sourced and consummated for a merger, SPAC shareholders have the opportunity to redeem their shares and vote on the merger. These investors then have their units ‘purchased’ (usually in the form of Class A stock), following which, after 52 days, the shares are broken down into further units and can be traded normally as shares. This supposed ‘Public Market Short Cut’ has led to some notable successes over the past 12 months including electric vehicle start-up Nikola, fantasy sports company and bookmaker DraftKings, and (as mentioned earlier) the monumental deal involving Grab.

Figure 1: A Typical Spac Structure and Timeline. Source: PwC

The Rationale?

This simplified explanation to the origination and development of a SPAC makes it sounds like there can only be upside for the company, investors and the sponsor. But what is the real benefit to these vehicles? Taking a step back to understand how investors redeem their shares allows us to value the rationale of these vehicles.

Most SPAC IPO investment has tended to be led by hedge funds and institutional investors with the key reason to their investment flow being categorized by their right to redeem their shares. In its IPO, a SPAC sells a ‘unit’ consisting of a share (usually priced at US$ 10), a warrant, and in some cases, a right to a fraction of a share. As mentioned above, the IPO proceeds are subsequently placed into a ‘trust’ and can only be invested in Treasury notes until the time a target company has been sourced and a merger is proposed. Only when this target company is approved by the shareholders can they redeem their shares.

Investors like the SPAC model for several reasons. Given the fact that a SPAC’s investors have the option to redeem their shares for what they paid for them plus interest, they essentially get a money back guarantee. It is also argued that investors have the opportunity to own a bigger stake in the ultimate merged company than they would be able to achieve in a ‘traditional’ IPO listing.

On the flipside, companies going public via a SPAC can accelerate the business’s public market entry with the financial reporting requirements for listing considerably reduced. This is compounded by the fact that companies do not need to demonstrate historical financials, but can market themselves on projected future earnings. Alongside a better pricing transparency for these usually fast growing companies, SPACs have recently attracted a high quality of investor as well.

And of course, there is the Sponsor, who does take on the initial risk and deploy a substantial amount of their own capital (usually required to deploy around 3% of the amount of the IPO). Ultimately though, the Sponsor can receive a rewarding pay out for their efforts and risk by being granted 20% of the total shares issued plus the warrants, making it very popular for this stakeholder.

But what does this mean for Africa?

Africa has historically been a leading recipient in regards to certain innovative financing solutions (such as blended finance – do check out our last article on Blended Finance here – and has been lauded as a potential large market for Green Bonds). Given everything we have highlighted, there would certainly be an argument to say that African SPACs can be a viable future solution too. However, there are a few considerations which need to be taken into account.

The Sponsor for one, who takes on a significant portion of risk with the upfront capital requirements, has a lot hinging on them. In reality, how many potential sponsors are out there in Africa who are able to bear the upfront costs? Sponsors will also need to be chosen who have enough liquidity to get the team and operation up and running whilst subsequently carrying ‘name recognition’ with their potential investors.

One trend which has been witnessed in other markets is the use of celebrity involvement in helping to promote specific SPACs. There could be a potential for African celebrities to support SPACs focused on the continent to gain traction with both local and international investors. Of course, there are nuances which need to be taken into account around the marketing of a SPAC and making sure it is a viable fit for an investor. Earlier this year the US Securities and Exchange Commission released a Bulletin cautioning investors around the role of Celebrities in SPACs showcasing the ever increasing importance to regulation within the industry.

With the ever-increasing focus of international regulators on the SPAC market does mean it remains to be seen how this will affect SPAC potential in and for Africa. Not only has the SEC become active in commenting on the role of celebrities in relation to blank cheque companies but it has spoken out against the boom in industry as a whole. This places added scrutiny onto the market and leads to questions around a potential fall in SPAC activity. Already in April of this year, there were fewer than 12 SPAC issuances, the slowest month of activity since June 2020.

On the other hand, in the UK, the Financial Conduct Authority (FCA) has proposed changes to its listing requirements for certain SPACs. Currently a SPAC listing is typically suspended at the point it identifies a target acquisition, but this review will essentially enable an alternative approach to ensure this does not happen. This will only serve to attract more future SPACs to London and given the relationship between London based investors and Africa, this move could prove promising for future Africa focused SPACs being listed in London itself.

Another consideration to bear in mind is that in markets such as the United States, most sponsors will go and find a target company that is 3-4 times larger than the SPAC itself (e.g. a US$ 200mn SPAC would go after a business with a valuation of around $800 million). All the cash goes into this new entity, so in Africa that means there is a sizing issue. Many will say there are likely to only be a number of businesses with the necessary scale and valuation in specific sectors which could be considered for SPAC acquisition. One particular caveat to counter this claim though, is that in reality London’s sub-market of the London Stock Exchange, AIM, is full of businesses of this size, suggesting that there will be similar sized organisations out there as potential acquisition targets.

It could be argued as well that the current range of sectors which have utilised SPACs for listings over the course of the past 15 months now provide a sense of investor ‘fatigue’. SPACs focused on new sectors or new regions could provide the next exciting proposition to those investors out there. If anything, the recent Grab SPAC provides further legitimacy to this thesis, underlying the position of innovative business solutions solving problems in ‘frontier’ geographies and markets.

Image 2: Grab will be going public on NASDAQ through a US$ 40bn SPAC Deal. Source: Grab

For Africa, this could materialise in those sectors which will have a key role to play in the world’s battle against climate change. With Africa arguably being one of the continents standing to lose the most from changes to our environment due to the impact of climate change, those businesses which are actively involved in combating these changes (whether that be forestry businesses involved in the sequestration of carbon to those disruptive clean tech solutions) there could be a whole host of businesses which could make for innovative SPAC acquisition targets and provide a niche for future investors. This may become ever more poignant and considered in a COP 26 year.

To complement this, a number of local bourses have started gearing themselves up for potential SPAC listings on their exchanges. The Botswana Stock Exchange for one already include information to their listing requirements for SPACs within their Equity Listings Requirements documentation.

The Bottom Line

Essentially, SPACs can provide an elegant way to draw increased attention to Africa from a capital markets perspective. Having said that, the evolution of the SPAC market globally will likely have a big impact on whether SPACs also get traction in Africa, even if with much lower transaction sizes. We at ThirdWay Africa remain positive and focused on ensuring the growth and development of local stock exchanges; without them there will always be limited exit opportunities for both entrepreneurs and private equity investors. If we can attract institutional capital to innovative businesses which are harnessing some of the continent’s USPs (such as its abundance in natural capital) we can provide a new paradigm from which to use another innovative financing vehicle to drive catalytic (and institutional) capital both within and towards the continent.