Article By Beppe Jaccarini
Special Purpose Acquisition Companies (SPACs) have seen a significant rise in popularity in recent years, particularly in the United States. A SPAC is a company that raises money through an initial public offering (IPO) with the purpose of acquiring an existing private company. The private company then becomes a publicly traded entity through the merger with the SPAC. The idea behind SPACs is that they provide an alternative to the traditional IPO process for private companies that want to go public.
The rise of SPACs can be attributed to several factors. One of the main reasons is the increased market demand for alternative investment opportunities. With the stock market reaching record highs in recent years, many investors have been looking for new ways to diversify their portfolios. SPACs provide a way for investors to gain exposure to private companies that would otherwise be difficult to access. Additionally, the process of going public through a SPAC is generally faster and more streamlined than the traditional IPO process. This can be an attractive option for private companies that want to access the capital markets quickly.
Another reason for the rise of SPACs is the increased interest in technology and disruptive start-ups. Many of the companies that have gone public through SPACs in recent years have been technology companies or companies in other high-growth industries. The potential for high returns from these types of companies has helped to drive demand for SPACs.
The popularity of SPACs in the United States has also led to an increase in their use in European markets. In 2022, the number of European SPACs has continued to grow, with more than 100 SPACs raising over €20 billion in Europe. This trend is driven by the growing number of companies seeking to access the public markets in an efficient and cost-effective way, and by investors seeking new opportunities for capital deployment.
However, the European market for SPACs is still relatively small compared to the US, where the number of SPACs reached a record high of around 300 in 2022, raising more than $100 billion in total.
Despite the growth of SPACs in Europe, there are still some concerns about the lack of regulation and oversight in this market. Some experts have raised concerns about the quality of companies that are being taken public through SPACs, as they may not have the same level of financial and operational stability as companies that go public through traditional IPOs.
In fact, there has been a recent slowdown in trajectory in the number of SPACs going public. The main reason for this is that the market has become increasingly saturated with SPACs, leading to a decline in investor interest. Additionally, there have been several high-profile SPACs that have failed to complete acquisitions, leading to negative sentiment towards the structure.
There is no clear consensus on what the future holds for SPACs. Some experts believe that the recent fall in popularity is just a temporary setback, and that SPACs will continue to be an important way for private companies to go public. Others argue that the recent regulatory scrutiny and negative sentiment towards SPACs will lead to a decline in their use in the long term.
In response to these concerns, the European Union has proposed new regulations for SPACs, which aim to increase transparency and investor protection. The proposed regulations would require SPACs to disclose more information about their operations and the private companies they are planning to acquire. Additionally, they would also require SPACs to have a minimum amount of cash on hand, which would help to ensure that they have the necessary resources to complete their acquisitions.
Despite these concerns, the future of SPACs looks promising in European markets. As more companies look to go public and raise capital, the demand for SPACs is likely to continue to grow. Additionally, the proposed regulations for SPACs in Europe are expected to increase investor confidence in these investments. Furthermore, the number of successful SPAC mergers in the US has been increasing, which can also attract more companies and investors to consider this route for going public.
Disclaimer
The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd. is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.