Special purpose acquisition corporations (SPACs) — What you need to know
EARLIER this year, privately held Micro-Financing Solutions Limited (MFSL) purchased 79.08 per cent of publicly traded SSL Venture Capital Limited (SSLVC) for a total consideration of $30.0 million. They did this through MFS Acquisitions Limited, a special purpose acquisition corporation (SPAC) created to facilitate the transaction. Following the acquisition, SSLVC was rebranded as MFS Capital Partners Limited as of August 18, 2022, where it now trades under the ticker “MFS” on the Jamaica Stock Exchange (JSE). The listing ceremony was held at the Jamaica Stock Exchange (JSE) on August 25.
But what is a SPAC? In more developed markets, utilising this corporate structure has been common since the 1990s. However, this is the first such entity to be created in Jamaica, a sign of Jamaica’s increasing maturity as a financial destination. A SPAC is used either to raise capital through an initial public offering (IPO) or to takeover or merge with an existing business. It does not engage in any commercial activities. SPACs have emerged as a popular alternative for many experienced management teams and sponsors interested in taking companies public. This trend is anticipated to persist as an expanding number of private equity (PE) firms, venture capital (VC) funds, and operators form more SPACs.
Although the first SPACs were established in the 1990s, it wasn’t until more recently that blue-chip investors started showing particular interest in them. According to a study of data provided by Dealogic that was conducted by PricewaterhouseCoopers (PwC), the percentage of IPOs in the United States that were made by SPACs increased to 30 per cent in 2019 from 4 per cent in 2013. The increase can be attributed to the fact that a greater number of prestigious private equity firms, banks, and high-profile entrepreneurs are forming SPACs. This, in turn, has attracted owners of private companies who are interested in taking their businesses public. For instance, big investment firms such as Pershing Square Capital Management, Goldman Sachs, and TPG Capital are among those participating in the most recent wave of SPAC offerings.
SPACs can contribute to capital
One such benefit includes more access to capital because even though some smaller and medium-sized companies may not be the best candidates for traditional IPOs, they may still wish to continue funding research, investing in brand awareness, or making acquisitions in order to pursue growth. Existing enterprises can keep a share in their operation while also gaining access to liquidity that they would not have had otherwise if they merged with a sponsor for a SPAC. Another benefit that can accrue from establishing a SPAC is that of greater market certainty because stock prices are unpredictable and it can be difficult and expensive to identify the optimal time to debut on a stock exchange. A corporation runs the risk of “leaving money on the table” if it is overly conservative in its pricing strategy and sets the price of its offering too low. Additionally, the market may have been weak on the day the company went public, which could have a negative impact on the price of the shares.
The strategy used by MFSL was a reverse take-over of SSLVC by a SPAC set up by MFSL. This marked a significant moment in Jamaica’s capital markets, because transactions like this have historically been uncommon, although they are widely used in other markets. This proved that aside from the conventional IPO and other traditional ways of raising funds, alternative corporate financing solutions are available for firms that operate within the Jamaican economy, achievable by collaborating with brokers such as VM Wealth Management (VMWM) that display a high level of expertise of the stock market legislation in both its capacity as advisor and arranger for this transaction. A high level of innovation, resourcefulness, and commitment such as this is crucial for guiding firms to the next level of success in their respective industries and contribute to more efficient capital markets within our country.
With a SPAC merger or acquisition, there can also be significantly less ambiguity because as part of the agreement, target companies have the ability to negotiate the price of their stock with the SPAC sponsor, in contrast to the usual initial public offerings. To put it another way, targets can “lock in” a price, which helps to protect the value of the asset from the volatility of the market. Other benefits from SPAC transactions include more flexible deal terms because in addition to negotiating valuation, SPACs allow target corporations to negotiate other deal terms in their favour. This could involve structuring the transaction to bring in more money through a private investment in public equity (PIPE) and adding debt or equity. SPACs also offer target companies access to experienced managers. In this way, SPACS behave much like PE firms in that a group of investors raise funds to strategically buy companies — the main difference being that the SPAC executes a public versus private offering.
In summary, through diverse means, a business can arrive at its key objectives and there is no “one size fits all” for every firm’s capital solutions. Therefore, it is important now more than ever that companies think outside the box in order to bring increased value to their stakeholders and approaching the capital markets for these solutions can prove to be an efficient way to do this. Indeed, traditional ways may be tried and true, but sometimes it can be beneficial to take a path less travelled.
Marlon Rhoden is a Research Analyst at VM Wealth Management Limited with a passion for seeing clients build their wealth. His particular focus is the Bond Market and Counterparty Credit Risk.