Are SPACs going to take off? Watch this space
Technically, a SPAC (special purpose acquisition company) is an attractive alternative to the initial public offering. They have been around for five years now, and experience has been mixed. But interest is building.
In 2014, Special Purpose Acquisition Companies (SPACs) made their way to the South African market. This was after the JSE amended its listing requirements to accommodate these new investment structures. The new rules permitted cash shells to list on the bourse in order to raise the capital needed to afford the business’s future money makers.
A SPAC is actually an IPO in reverse. A corporate shell can list in order to raise the money it needs to buy the assets to kickstart the operations of its envisioned business. The rules are looser, but there is no room for management teams to play fast with them. They have to sell their equity story, their business idea and themselves to investors, and they only have 24 months to realise those promises. The faint-hearted should probably stick to what they know, but SPACs are perfectly positioned for private venture capitalists to enter the enterprise, and private equity investments to exit it.
The SPAC concept was conceived in the US in the early 1990s and quickly spread to other parts of the world. Goldman Sachs, however, only underwrote its first SPAC IPO in 2016, while Wall Street welcomed its first blank-check issue a year after that. The Nasdaq has been SPAC savvy since 2008.
In South Africa the vehicle is still very much in its infancy. Only eight listings were added to the bourse’s arsenal over the last few years, bringing more than R8-billion in funds to the fold. These companies traded under the sector banner of non-equity on both the mainboard and the AltX.
Two of these ventures have failed since then and subsequently delisted. They were unable to find viable assets within the prescribed two-year period. M-FiTEC International, which listed on the AltX in November 2015, failed to tie down any deals by deadline and was forced to return the R76.2-million initially raised minus cost plus interest to investors by mid-November 2017. A company called Sacoven suffered the same fate the year before.
The primary distinction between an IPO and a SPAC is that the latter is able to raise funds without any operational assets. The second is the prescribed safeguard where funds are kept in escrow during the grace period, and will be partially refunded when deals don’t make it to the table.
At the start, the Public Investment Corporation (PIC) was the structure’s biggest supporter, considering it an apt avenue to create more black industrialists. It still owns a significant stake in GAIA Infrastructure Capital, which invests in operating infrastructure assets in southern Africa’s energy, transportation and water and sanitation sectors.
The PIC holds 42% of the company, but, like all of its counterparts, GAIA lacks the scale necessary to attract other institutional investors.
The company listed in November 2015, and completed its first transaction at the end of 2016, when it acquired a 25.2% stake in the Dorper Wind Farm, in the Eastern Cape, for R501-million. It has since also invested in the Noblesfontein Wind Farm.
It returned to the market in the past few years to raise capital to buy R1.7-billion in infrastructure assets.
CEO Prudence Lebina said at the time that the priority was to scale the company asset base to the point where it becomes a feasible investment option for institutional investors.
But every SPAC story is different, says Patrycja Kula-Verster, business development manager of the JSE’s primary equity market
The success or failure of a SPAC finding sufficient investors is predominantly driven by the quality, reputation, and track record of the management team, and the confidence they instill in their investment strategy and their ability to source and execute transactions.
Kula-Verster says being a listed entity gives the management team a platform to potentially raise significant capital to enable them to make meaningful acquisitions, without facing some of the challenges experienced by traditional private equity ventures with specified exit restrictions.
From an investor’s perspective, each investor gets the opportunity to co-invest alongside the management team, as all associated costs to future dealmaking are agreed upon upfront and all acquisitions approved by shareholders.
The first SPAC to come to market was Capital Appreciation in February 2017. The company owns, manages, invests in, and promotes established and developing fintech enterprises – their platforms, solutions, products and applications. Its current client base includes all major local banks and other financial institutions. In the last two years, the company has established technology divisions that specialise in digital payments and cloud service offerings.
It probably won’t return to the capital markets very soon. Its financial results for the year to March 2019 that were released in the third week of November, revealed a highly cash generative business. With a cash generation ratio of 122.8% relative to trading profit, the company was sitting on a cash pile of R611.2-million at the time of reporting. This represents 39 cents per share, relative to a closing price of 74 cents at the end of March.
Bradley Sacks, joint CEO, told Business Maverick that the group’s cash resources will further fund anticipated organic growth and thereafter the cost of new, but complementary acquisitions.
Renergen, the emerging producer of helium and liquefied natural gas, with existing production and sales of compressed natural gas, listed on the AltX in June 2015. The junior mining company’s principal asset is its 90% shareholding in Tetra4, which holds the first and only onshore petroleum production right in SA, giving it a first-mover advantage on the distribution of domestic natural gas.
Its Virginia Gas Project was completed and commissioned within 21 months and went live in June this year. Tetra4 intends to decommission the compression station and begin exclusively producing LNG and liquid helium once the new plant is operational. The natural gas resource contains one of the richest helium concentrations recorded globally.
Renergen is also listed on the Australian Securities Exchange and on 20 November announced the approval of a secondary listing on the A2X Markets Exchange.
In July 2017, RH Bophelo became the first black-owned and managed healthcare company to list on the JSE as a SPAC, with grand plans of bringing more affordable healthcare options to the people of South Africa. The company bedded down its first deals within months of listing by acquiring the Vryburg Private Hospital and Africa Healthcare (AHC). In May the following year, it acquired 30% of the Rondebosch Medical Centre.
It turned out to be the best-laid plans for the company’s quality and reputable executive. It managed to raise sufficient funds, and source and execute the required transactions prescribed by SPAC listing requirements 10 months ahead of the stipulated JSE deadline.
It has bulked up in medical facilities since then and recently announced it aims to raise R1.5-billion in its next round of fundraising
John Oliphant, chairman of the board and former head of the Government Employee Pension Fund, says all deals were concluded at favourable rates, and the underlying assets are performing in line with expectations.
AEP Energy Africa and Hulisani Ltd round out the number of SPAC contenders in the local market. SA represents just 1% of global equity trade, so this sector is a mere atom in the SPAC universe. But it is a universe that is currently going through its second big bang.
The volume of blank-check IPOs in the US increased more than 650% in the five years through 2018, which was the biggest year for SPAC issuance since 2007, according to Dealogic.
The sector went through a rough patch after the financial crisis. The Wall Street Journal states that greater regulatory attention played a role in that downturn, but there were also fewer privately held businesses seeking to go public at the time, and so the list of takeover candidates for SPACs was short.
“Many SPACs ended up failing to find companies to take over before their specified time limits ran out,”it says.
Recently, though, an excess of capital has led investors to seek out merger and acquisition opportunities more aggressively, and that has led to the return of SPACs. In fact, in 2018, SPACs had their best year ever in terms of deal value and their highest volume since 2007, according to the WSJ, with 46 IPOs raising nearly $10-billion. This number is projected to rise in 2019, with 15 SPACs raising $3-billion in Q1 alone.
But Spacs are far from a sure thing. When the WSJ looked at SPACs from three or four years ago, it found that more than half of them traded below their initial offering price. Of the blank-check companies that went public in 2015 and 2016, more than half are now trading below their IPO price, The Wall Street Journal’s analysis shows.
Local research shows similar subdued intrinsic values as the majority of SPACs trade at large discounts to their listing price, with relatively low volumes of their shares being traded.
But the Bloomberg Law 2020 series states that with increasing market volatility and uncertainty and the unhappy returns of IPOs over the last few years, private equity will increasingly seek alternative exits for its startup venture agendas in the years to come.
The two most popular exits for private equity have long been mergers and acquisitions and public offerings.
“A SPAC provides advantages for private equity over a traditional IPO exit,” Bloomberg reveals.
“These investment vehicles offer more flexibility than is typically offered in private equity fund agreements. The SPAC sponsor retains a 20% equity stake after the IPO is completed, a feature that can pay off handsomely once a suitable merger is accomplished.”
There are a number of tailwinds that suggest that SPACs might become more prevalent in the coming years — both the increasing sophistication of public market investors and the strong demand for PE-style investments to represent powerful secular trends. This is surely a space to keep an eye on, both locally and internationally. BM