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Glut of Spac issuance makes hunt for deals more competitive

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A record-breaking boom in US blank cheque companies has ramped up the competition in the hunt for acquisition targets.

Spacs, or special purpose acquisition companies, have raised $51.3bn in the US this year, the highest amount on record and almost half of the $111.6bn raised in initial public offerings, according to data provider Refinitiv. Blank cheque businesses have raised more in 2020 than over the past 10 years combined.

Spacs raise investor capital through a listing on a stock exchange and then hunt for a company with which to merge, offering a side door to the public markets compared to a traditional IPO. As a safeguard, Spacs generally have a set time limit — typically two years — to find a deal before handing money back to shareholders. Stockholders also have the option to vote against a proposed merger.

Chart showing that Spac volumes by value have almost caught up with traditional IPOs

Some private companies have opted to negotiate with a Spac because the process can shave months off a traditional IPO. A merger between a company and a Spac can take around four to six months to complete, compared to a conventional IPO process that can last 12 to 18 months, or longer.

Negotiations with a Spac can also provide a company debating a merger with clarity on its valuation before going public, which can be appealing in volatile markets. In an IPO, the valuation is set only a day before the listing and relies on the judgments of investment bankers and other advisers.

The heavy Spac issuance comes as other money managers raise multibillion-dollar investment funds, pushing so-called dry powder — capital pledged to private equity and venture capital companies to acquire private businesses — to a record. Taken together, Spacs face more pressure than ever before to secure a target, according to bankers and lawyers.

Chart showing that Spac listings have boomed in 2020

“There’s been a significant surge of activity on the front end, so there needs to be an increase in [merger] activity,” said Paul Tropp, an attorney with Ropes & Gray who has worked on some of the year’s biggest deals.

“That bears watching over the next 12 to 18 months to see how many of the Spacs that have gone public in the last six months are successfully able to execute a positive business combination,” Mr Tropp added.

The challenge for this year’s Spacs is compounded by those that listed in the past two years that are still hunting for a deal. The 124 Spacs launched this year that have yet to agree a merger with a private company join 27 from 2019 that remain on the hunt, according to data from Dealogic. Analysis of the data showed that for Spacs that listed in 2018, it took about 14 months to announce a deal on average.

Chart comparing Spacs from 2019 and 2020 that are searching for an acquisition

Not all dealmakers are sitting idly on the sidelines. Chamath Palihapitiya, a former Facebook executive and venture capital investor, is behind two Spacs that listed in April that have already announced acquisitions. Social Capital Hedosophia II and III will merge, respectively, with Opendoor Labs, a tech company, and Clover Health, which uses data analysis to reduce healthcare costs, in two of the year’s biggest deals. Mr Palihapitiya’s first Spac merged with Virgin Galactic, Richard Branson’s space travel company, last year.

As Spacs become more popular, they are attracting a broader set of investors, sponsors and target companies that are considering them when raising equity capital.

“We’ve seen several clients now who were considering a traditional IPO [that] are now considering a dual track,” said Michelle Gasaway, a partner at law firm Skadden Arps. “It was common for years to consider M&A alongside an IPO but now they are considering a Spac alongside the IPO.”

The US accounts for 99 per cent of the money raised in Spacs globally this year, but the newfound popularity may be soon mirrored abroad. Spacs have gained some ground outside the US but one notable deal underscores the risk of Spacs and the importance of due diligence before a deal is done: Wirecard, the German fintech that was exposed as a fraud, joined the public markets after merging with a Spac.

Investment bankers and attorneys who work on the deals expect them to become a mainstay of the equity capital markets.

“Fundraising is a global business,” said Bennett Schachter, a Morgan Stanley banker specialising in Spacs. “When issuers overseas see the amount of capital being raised and deployed in the US, they very naturally ask: ‘How can we bring that technology overseas and deploy it locally?’”

Not only has the year included record issuance, it has also seen the biggest merger between a Spac and a private group. Last month, United Wholesale Mortgage merged with a $425m Spac in a deal that valued the company at $16bn.

“As Spacs get larger, the . . . deals get larger,” said Ms Gasaway. “That’s a trend we’ve seen for some time and especially this year with the number of Spacs increasing.”



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Dual-class shares: duelling purposes | Financial Times

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The ship looks set to sail on Britain’s aversion to dual-class shares. A government commissioned review, released on Friday, backs the structure, which is popular with tech founders keen to retain control after taking public money.

Lex, among others, has opposed weighted voting rights as poor governance. Advocates point to the bigger picture: spurn dual-class shares and lose out on big initial public offerings. London would not be the first to cave. A similar argument saw Hong Kong capitulate after Alibaba took its record $25bn IPO to New York in 2014. Singapore swiftly followed suit; even Shanghai now hosts companies with dual-class shares on its tech-oriented board.

Ron Kalifa, author of the UK report, lays out the numbers: the US nabbed 39 per cent of the 3,787 IPOs on major exchanges between 2015 and 2020, while the UK took under 5 per cent. US companies with dual-class shares have outperformed peers, but this is as much to do with tech credentials as, say, Mark Zuckerberg’s stranglehold on Facebook votes. Proponents also applaud the poison pill conferred by weighted voting rights. This, they say, would have seen off pesky foreign buyers of British assets such as Arm and Worldpay, coincidentally Kalifa’s own old shop.

If dual-class shares are inevitable, curbs should be too. Sunset clauses, converting founders’ shares to ordinary class over time, are one obvious step already in use. At Slack, for example, shares convert over 10 years to common stock. Another is to exclude certain votes; on executive pay, say, or related party transactions.

One big caveat: dual-class shares will not open the floodgates to new listings. Ask Hong Kong, a market four times as liquid as London. Post-relaxation of the rules, China tech listings continued to flock to the US because valuations are higher. Last year, despite ground-zero Sino-US relations and tightened accountancy rules, Chinese tech companies flocked to the US. The current run of “homecomings” — US-listed companies such as Alibaba securing secondary listings in Hong Kong — is politically driven. More effective, certainly, but not an option for the UK.

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A Lucid sign of the tech bubble

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This week, tech stocks dipped and a generation of entrepreneurs was offered a glimpse of its own mortality.

At the very least, it has been a reminder that a reset is long overdue after a year-long surge in tech stocks — and that capital will not always be as readily, and cheaply, available.

When cash is plentiful, the close alignment between Wall Street and Silicon Valley can feel almost unbreakable. Tech start-ups promising to change the world supply the big vision for investors eager to find a reason to believe. Conditions like this favour so-called story stocks — ventures that can spin a simple narrative about a huge new market opportunity.

A classic of the genre is the electrification of personal transport. This week’s additions to the dream of a world beyond combustion engines include the $4.6bn flowing into luxury electric car maker Lucid Motors and the $1.6bn raised by would-be air taxi service Joby Aviation.

Despite the obvious risks when a wave of capital washes into tech start-ups, there are some benefits. It can, for instance, help to drag new technologies into the mainstream: the tech and telecoms bubble at the turn of the century may have led to huge financial waste, but it funded the communications networks and digital infrastructure to support the next generation of internet companies.

It also means promising technologies are no longer at risk of being underfunded — though simply pouring in cash won’t bring them to commercial viability any quicker. It has taken many years for battery technology to ride the cost curve. The fact that billions of dollars are suddenly available cannot speed that process. Yet Wall Street’s financial vehicle du jour for channelling money into tech start-ups — so-called special purpose acquisition companies that raise cash and then seek a promising company to merge with — come with two very big warning signs.

The first is that, in this new form of stock market-financed venture capital, windfall profits can flow to promoters and speculators long before the new businesses prove their commercial viability. Traditional venture capitalists usually don’t see profits, or get the chance to sell, for years.

The different incentives embedded in Wall Street’s version of VC is exemplified by the Lucid deal. On paper, the Spac involved has already made an 87 per cent profit from its investment, just for doing a deal. And its promoters, who paid a grand total of $25,000 for their “founder shares”, are sitting on a stake the market values at $1.5bn.

The Spac has also provided a vehicle for wild speculation. Its publicly traded shares had already shot up more than fivefold in anticipation of a deal, before falling back by nearly half.

There are some mechanisms to encourage a longer term view, such as placing limits on how soon a Spac’s promoters or follow-on investors can cash out. But the 18 months lock-up on the Lucid Spac’s founders is nothing compared with the many years traditional VCs often have to wait to see a return.

The second concern is that the current close alignment between investors and entrepreneurs is highly unlikely to last. Financial conditions will change. Even with perfect execution over many years of the promises made by start-ups, it will be hard for the new companies to support their current valuations.

Unlike companies that arrive on Wall Street through a traditional initial public offering, Spacs make revenue promises upfront. Joby says it will not have any sales at all until 2024, but then reach $2bn in revenue five years from now. Lucid, which has not launched its first vehicle, is predicting that annual revenue will rise above $20bn within five years — a figure that Tesla only topped in 2019.

These promises are supporting heady valuations. Lucid is judged, on paper, to be worth $24bn. Tesla only reached that after it had been making and selling cars for five years, and a year after its groundbreaking Model S had hit the road.

It may be the case that the world is on the way to more electrification, with luxury cars like those made by Lucid, and air taxis like those operated by Joby, an important part of a clean energy future. But when times change on Wall Street, many investors may no longer have the patience to go along for the ride.

richard.waters@ft.com



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Soho House plans to list in New York with $3bn valuation

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Soho House, the private members’ club group, is making plans to list in New York as early as next month in order to capitalise on investor appetite for travel and leisure stocks as the pandemic subsides.

The company intends to join the stock exchange with a valuation of as much as $3bn, despite the closure due to coronavirus restrictions of 11 of its 27 clubs across Europe, Asia and the US, say people familiar with matter.

Speculation that the target price will rise from a $2bn valuation set in a $100m funding round, led by its majority shareholder the US billionaire Ron Burkle in June last year, is based on anticipation of a boom in demand for travel stocks.

The hospitality group, which also owns 20 restaurants, 16 spas and two cinemas, declined to comment on the plans, first reported in The Times.

Shares in the hotel company Marriott are up 26 per cent since February, while Airbnb’s share price has increased more than 40 per cent since it listed in December.

Despite steep drops in revenues as a result of sites being closed, Soho House has managed to retain more than 90 per cent of its paying members during the pandemic. A typical annual membership costs £1,750.

However, Soho House’s recently filed accounts show the company stopped making interest payments on its loan in cash last year, instead choosing to use a “payment in kind” option. This allows companies with limited cash flow to pay lenders with more debt instead.

Permira Debt Managers, the credit arm of the private equity house, originally provided this £350m loan to the private members’ club in 2017, describing the debt deal as its “largest ever direct lending investment” at the time.

The private debt deal came two years after Soho House had to scrap a £200m high-yield bond sale, as investors balked at the company’s high leverage and limited free cash flow.

It is the second time Soho House has mooted a stock market flotation.

It pulled a planned New York listing in 2018, saying it did not need to raise capital as it had Permira’s backing and its owners — who include Burkle, the hospitality entrepreneur Richard Caring and Soho House founder Nick Jones — did not want to sell out.

Jones, who opened his first Soho House in 1995, told the Financial Times last year that the group did not need to consider a listing as “there is a nice lot of demand from people to invest in the company as it is”.

Over the past 26 years, Soho House has grown rapidly, becoming a hotspot for celebrity guests by targeting wealthy urbanites in the creative industries.

According to its 2019 accounts, it made £293m in revenues, 49 per cent of which came from food and drink sales and 20 per cent from members’ subscriptions with the remainder coming from its own-brand range of homewares. It reported a pre-tax loss of £77m.

During the pandemic, the group was forced to lay off 1,000 of its 8,000 employees.



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