Empty shells to navigate the Stock Market

SPACs are triumphing on the New York Stock Exchange.Nicole Pereira / getty

Spanish investors are going to have to learn a new financial concept that, as almost always, is imported from the United States.

The SPACs (special purpose acquisition company) are all the rage on Wall Street and in the first quarter of this year they have already exceeded the 80,000 million dollars they raised in 2020, ahead of the traditional form of IPOs, through public offerings of sale (IPO).

The number of SPACs already exceed 500 in the American market.

More information

• What are SPACs?

  The mechanism that triumphs on Wall Street and brings hundreds of companies to the stock market

The idea is simple: a promoter - usually a prestigious businessman or investor - almost always accompanied by a famous media man - an elite athlete, for example - asks investors in the market for money to create a SPAC that will be listed on the Stock Exchange.

The objective of this empty shell is to acquire companies of medium or small size that can be an interesting business.

In this way, the SPAC takes control of one or more unlisted companies (sometimes they are listed) that automatically go public.

As the financial expert Javier Amo, professor at the Institute of Stock Market Studies, points out, “this operation is like a traditional venture capital, but reversing the order.

First the money is raised and then the company is sought.

The idea is to take control of the company and

free-float

[shares available on the Stock Exchange] will be the percentage that you have bought from the former owners, "he explains. In this upside-down world of SPACs, the developer explains his investment objectives, the business sectors to which he will allocate the money and also how much he will receive to carry out the operation. Without much more information, he launches to ask for funds: investors give him a blank check so that he can dispose of his savings. If the promoter does not find any company in which to invest in two years, he is obliged to return the money entrusted to him by the shareholders.

Likewise, as Noelle Cajigas, partner in charge of capital markets at KPMG in Spain, explains, “if an asset is found within the agreed period, but it does not fit the profile promised to investors at the time the SPAC was launched on the market , shareholders have the right to vote against and wait for a better opportunity or get their money back ”.

These are the only exceptions to that blind faith that the investor places in the SPAC promoter, whose remuneration will be made in the form of a percentage of the capital of the SPAC itself.

Javier Amo emphasizes that the promoter will keep 10% or 20% of the SPAC, for example, according to what he established in the statutes as compensation for his work.

Great liquidity

The high liquidity in the markets and the search for opportunities in medium or small companies have made investment in SPAC a phenomenon in the United States, and its risks are not few. Cajigas points out that the risks of SPACs can be more complex than those of an ordinary share. "I would say that to be part of balanced portfolios, diversified with other risks, it does not have to be discarded as long as the investment is well understood". For its part, Amo also considers the investment in SPAC positive for the shareholder, since it allows them access to a prohibited market such as venture capital. "Of course, I feel a bit of reluctance at that blank check that is given to the promoter and that, saving the distance, reminds me of those Ruiz Mateos promissory notes of such a bad memory," he concludes.

Also the founder of Microsoft, Bill Gates, spoke in a recent interview with CNBC warning that it can encourage young companies to go to market too early, which implies taking a high risk for investors. And the fact is that the concept of a bubble has been linked to the creation of SPACs, both themselves and listed companies and also in the sectors in which they invest or promise to invest. A phenomenon that Roberto Scholtes, UBS strategy director in Spain, explains: “The most notable thing in these months has not been that the SPACs have created a generalized bubble, but that they themselves entered a clearly speculative dynamic. The index that brings together these companies - which we remember are shells with mere liquidity - rose by more than 20%, although it has already deflated in recent weeks ”. And adds:"Many have dedicated themselves to buying platforms that operate with cryptocurrencies or start-ups linked to the revolutions of the electric car and renewable energies, which undoubtedly contributed to the overheating of these segments."

More information

• The CNMV advances that the record of IPOs will be broken with six operations in the first semester

There are numerous announcements and intentions to create SPAC in Europe and Spain.

The National Securities Market Commission (CNMV) itself, through the mouth of its president, acknowledges that there are contacts with promoters, financial entities, lawyers and other market players that are studying this new form of venture capital.

Although the president of the supervisory body, Rodrigo Buenaventura, recently pointed out that they had attended SPAC presentations whose projects were not yet mature.

The KPMG expert comments that it is difficult for a situation like the one experienced in the United States to reproduce in Europe: “It has an ecosystem of investors and dimensions that today make it difficult to think that in Europe we are going to reach comparable levels. Let's not ignore a reality anyway, and that is that the markets are global, with which European investors can participate in American SPACs and vice versa. Just as we have seen European promoters in American SPACs and vice versa ”, he explains.

Pegasus Europe, which will be listed on the Amsterdam Stock Exchange, is SPAC's most developed European project and is promoted by the billionaire and founder of the luxury firm LVMH, Bernard Arnault, and by former UniCredit director Jean Pierre Mustier.

They have asked investors 100 billion dollars and have targeted European financial companies that are experiencing an accelerated transformation of their businesses.

Money that for Scholtes will have its repercussions on the stock markets with the proliferation of mergers and acquisitions between listed and unlisted companies.

They will also push equity markets higher if they succeed in acquiring undervalued companies, and ultimately help improve solvency by bringing in fresh money to refinance your debts.

Legal touches

Rodrigo Buenaventura, president of the CNMV, recently declared that the SPACs could fit into the Spanish model with current regulations. However, for a greater "abundance and clarity" of these new vehicles of IPO, he pointed to the possibility of changing some aspects of the legislation on takeover bids, as well as the right of separation.

Thus, the takeover law should be modified so that, in the event of controlling the majority of the capital, the SPAC would not be obliged to launch an offer for all the shares of the company. Regarding the right of separation, this regulation should be outlined so that the investor can receive the same money that he contributed to the SPAC in case of not complying with the two-year period to make the investments or when his investment does not comply with the provisions of the company's issuance prospectus.