Tech and Special Purpose Acquisition Companies (SPACs) see interests align

Research suggests that tech businesses are the preferred target for a large number of SPACs that have declared which sectors they are looking to invest in. The research also indicates that the TMT sector accounts for considerably more than other sectors (30% of SPAC investment).

And the attraction goes both ways, it seems. Why is this?

A viable alternative to IPO

SPACs offer young and fast-growing tech businesses seeking a listing an alternative to the traditional IPO.

Many will not have the credentials of a traditional IPO candidate, possibly being unable to deliver the kind of long-term financial and operating track record traditionally expected of a successful IPO.

They may be in the very early stages of development, looking for ways to finance the research and development programmes that their future success depends on, and are certainly likely to be pre-profit and in some cases pre-revenue (unusual on a traditional IPO).

For example, a number of untested electric vehicle companies, including Nikola, Fisker, Lordstown and Canoo, “SPACed” on to the public market in the last year and have yet to generate meaningful revenue.

Disruptive companies tend to have an affinity for disruptive processes, and many tech groups see SPACs as a disruptive force in the IPO market.

They also tend to view the traditional IPO process as cumbersome, time-consuming and expensive, although the evidence suggests that the cost of joining forces with a SPAC can be just as high, unless offset by achieving a high multiple on listing.

Negotiating with a SPAC on price also holds an appeal for venture capital firms looking to offload a business they have supported through early financing. There is far greater uncertainty in pursuing an IPO, where the value achieved will depend heavily on the state of the equity markets on and around listing day.

Too many SPACs, too few targets

The extraordinary proliferation of U.S. SPAC formations in the last 18 months means that there is now intense competition to find appropriate targets within the lifetime of the process, usually 24 months.

That competition will remain fierce even though we have seen a lull in SPAC formations in Q2 2021, as comparatively so few of those already formed have completed a de-SPAC acquisition.

Increasingly we are seeing SPACs look offshore in continental Europe, the UK and Asia for assets to buy. One SPAC, Kyte, has been set up exclusively to target tech companies in Israel, which has an abundance of tech unicorn companies.

Research suggests that around 18 U.S. SPACs are specifically mandated to look for a target in Europe and this number may well grow as competition intensifies. Already, we are seeing U.S. SPAC investors appearing in competitive European auction processes.

SPAC transaction complexities

However, gaining a New York listing, with all the regulatory and tax implications that come with it, will not be the right route for all companies.

SPAC transactions are inherently complex and once underway can move at incredibly high speed. That can be very uncomfortable if the target company does not have the right processes in place.

It is unlikely that SPACs will replace the traditional IPO, although we could see the traditional IPO process being reformed to compete more effectively with SPACs.

Instead we believe SPACs will remain just one of a number of items in the corporate finance tool kit for companies (tech or otherwise) aiming one day to achieve a listing.