Special Purpose Acquisition Companies, or SPACs for short, never really took off in the UK.
True, the LSE’s Standard Market is a nod to the concept but complicated structures, high returns for sponsors and hefty fees have left SPACs on the IPO fringes.
In the US, it is a very different story.
The SPACs market is booming led by giant investors such as Blackstone and Carlyle Group with around 20% of new issues now structured in this way.
EdtechX Holdings Acquisition Corp (NASDAQ:EDTXU) is London-based but listed on Nasdaq in October, raising US$55mln in one of the most recent SPAC listings.
Benjamin Vedrenne-Cloquet, EdtechX’s chief executive, says that in the US the SPACs structure works very well, while valuations are also higher than in other markets.
How it works
A SPAC is a vehicle to acquire private companies.
Often called a ‘blank check’ company, it has no business itself when it floats, rather it looks for companies to acquire in its chosen field.
EdTechX, for example, will focus on businesses operating in the education, education technology and training sector.
A sponsor group comprising management and other cornerstone investors put up 5% of the IPO money for the SPAC. This is the ‘at-risk' capital.
Another group of investors puts up the remaining 95%, but this goes into an escrow account where it earns interest.
Once the SPAC’s management finds a suitable acquisition, it is presented to these investors who decide whether to go ahead or not.
If not, their money is returned with interest earned up to that point.
For institutional investors, hedge funds and others it is a way to Park cash and flexibility when they invest at the IPO.
They also received a free warrant in EdTechX, says Vedrenne-Cloquet
There is no management fee he says, with costs covered by the sponsors capital.
There is also liquidity in the SPAC, he adds, as to whether the listing is on NASDAQ or the NYSE the requirement is a minimum 400-450 investors.
Typically, this is achieved by bringing in cornerstone institutional investors and following up with a syndication to retail investors.
Though similar to private equity in some ways, another advantage of SPACs is there is no exit date as it is a listed company, says Vedrenne-Cloquet.
As a market product it works, he adds. Institutions can Park cash, earn US Treasury rates of interest and then either investor get the money back.
“That [structure] explains why there is a huge number in US (and none in the UK).
Now listed, Vedrenne-Cloquet has started to look for its first acquisition.
In size terms, this can be anything from US$100mln up to US$1.5bn, he says, though it is likely to be up to US$600mln.
The aim is to be a “consolidation platform for "21st-century education and future skills”.
Established education groups
EdTechX has given itself 18 months to make an acquisition but Vedrenne-Cloquet is keen to have something tied up within six months.
“We are interested in established educational training groups,” he says.
These already will be of some size, have proper cashflows and be growing.
“Through us, they get more firepower to consolidate opportunities in the sector, which is extremely fragmented.”
“We can also help them take advantage of what technology is available to accelerate their development.”
In short, established businesses with strong fundamentals that can grow through acquisitions and digital transformation.
Europe, East Africa and SE Asia have many fragmented companies, ready for consolidation, he adds.
Benefits of simple structure
For this the SPAC is a simple structure and already in a liquid market with a listed stock.
While having a listing comes with more regulation than as a private concern, there are more benefits.
Vedrenne-Cloquet has a five-year plan for EdTechX that will see it becoming a US$1bn business with 20% digital revenues and he sees lots of opportunities.
Education is a US$6trn business, growing at 8% per year.
“We are first SPAC in this sector, it’s been done everywhere else.”
“There are 40-50 businesses we are tracking but there is ‘short-short’ list of three.
“We are looking to acquire several companies in those geographies, not unicorns but businesses that will benefit from an injection of capital.“