The SPAC Party Gets Going in Europe, This Time With Better Terms

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By now we all know just how U.S. investors went crazy for SPACs at the turn of the year, pumping $90 billion into the special purpose acquisition companies from December through February alone.

Blank-check companies raise money from investors in an initial public offering and then merge with a company that’s itself looking to go public. The targets get a wad of cash while avoiding the rigmarole of their own IPO. The method allowed a slew of companies to soar to multibillion-dollar valuations even though they had no revenue, from Richard Branson’s space tourism company Virgin Galactic Holdings Inc. to electric truck maker Nikola Corp.

The U.S. Securities and Exchange Commission damped the frenzy with a series of announcements in March that warned about celebrity-endorsed SPACs (Shaq, A-Rod, and Jay-Z had all joined the party), noting that VIP involvement in a SPAC doesn’t mean it’s a wise investment. The deluge of low-quality SPACs and their subsequent poor stock market performance didn’t help, and investment in blank-check companies tumbled 89% that month from February to $4.2 billion.

So the main financial beneficiaries of SPACs—the sponsors who create them—are looking elsewhere to continue the craze. Top of the list is Europe, where the number of new SPACs accelerated from February to April, and there’s no sign of growth there abating.

Sponsors will need to proceed cautiously. Because they typically get 20% of the shares in the new venture, they stand to profit without having to worry too much about whether the target company is, well, any good. And the last thing sponsors want is for European regulators to spoil the fun before it even gets going.

That’s why a SPAC that listed in Amsterdam on May 14 is particularly interesting. Hedosophia European Growth is led by Ian Osborne, a London-based investor who’s already teamed up with Chamath Palihapitiya, the prominent SPAC champion, on a handful of U.S. offerings—many of which have proved to be less-than-knockout successes. Hedosophia is taking a different path from that of its U.S. cousins by giving more protection to investors and less generous terms to its sponsors. Backers will receive their full share allocation only if the company meets ambitious stock price targets, for instance. In the U.S., they usually receive them irrespective of the company’s performance.

The hope is to make investors expect higher standards for SPAC listings in Europe than have been the case in the U.S. There’s self-interest at play here: The terms might make it harder for sponsors who are just out to make a quick buck with little regard for the company’s subsequent success. In turn, that could prevent a new bubble and keep regulators off the SPAC market’s back. There would still be a party; it might just be a little more staid and respectable than the one that just fizzled in the U.S.
 
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