Private equity: the offshore perspective – why SPACs came of age in 2020
26 October 2020
The rapid resurgence of SPACs (Special Purpose Acquisition Vehicles) has been a quite extraordinary phenomenon of 2020. Bedell Cristin partners, Sara Johns and Kristian Wilson, look at why SPACs are increasingly becoming part of the offshore mainstream.
As we enter the final quarter of 2020 and the year starts drawing to a close, the changes and challenges it brought with it will undoubtedly have long-lasting effects. From a financial perspective, the impact on the global markets continues unabated, with the recently published Prequin Quarterly Update: Private Equity & Venture Capital Q3 2020 revealing the latest effects on private equity following the release of Q3 data.
Deals are getting done
The good news is that, despite a reported decline in fundraising, deals are still getting done. The North American market in particular has seen deal value rebound strongly in Q3 as investors seek safety in established markets via larger managers and funds. After a period of re-evaluation, sponsors are re-balancing their portfolios, using reportedly high volumes of dry powder to support opportunistic investing as an alternative to the more traditional leveraged buy-outs. Amidst a general flight to quality, interest in tech companies has soared, likely due to their perceived resilience and their ability to navigate others through change.
The resurgence of SPACs
Against this background, the rapid resurgence of SPACs (Special Purpose Acquisition Vehicles) has been a quite extraordinary phenomenon of 2020. Already this year, the number of SPAC IPOs has more than doubled compared with 2019 and gross profits are quadruple those raised last year - according to SPAC Insider, 139 SPAC IPOs have raised in excess of $54 billion to date during 2020 whereas, in 2019, 59 SPAC IPOs raised $13.6 billion. Now fully embraced by private equity, SPACs are considered an attractive alternative to the traditional IPO - a safer port in the storm for businesses and investors alike.
The reasons for the resurgence of SPACs are no doubt manifold, but time seems to play a part. The time saved by initially investing in and listing a SPAC shell without the need to diligence a fully-fledged business on IPO; the clear timeframe within which the SPAC must conclude its first acquisition; the speed at which a cash-rich SPAC can move to secure a suitable target and "de-SPAC". When markets are volatile, agility is of the essence.
But so, too, is substance. In such uncertain times, a major attraction of the SPAC is that it has significant cash reserves held in trust, to be released only on completion of a target acquisition or returned to investors exiting the structure before the de-SPAC is achieved. Private equity SPACs in particular also have highly experienced management teams, charged with sourcing their targets within pre-determined investment parameters. These substantive advantages are paired with further investor protections, typically including the right for investors to pre-approve a proposed target and, during the pre-acquisition phase, the right to have their investment returned if they don't like the direction of travel.
These two vital characteristics of SPACs – substance and agility – are key to their remarkable success in this year of challenge and change. Given this, it is perhaps unsurprising that more SPACs are finding their way offshore. Reputable offshore finance centres such as the BVI, the Cayman Islands, Guernsey and Jersey have built their reputations on just this combination: stable, well-regulated jurisdictions with robust, legal, political and judicial systems, they also offer considerable flexibility and agility in terms of the use, establishment, structuring and operation of the vehicles established there. Time and again, this has proved to be a winning combination - Jersey, for example, has a long-established reputation for the incorporation of listed holdcos and, according to Jersey Finance statistics as at 30 June 2020, is home to the greatest number of FTSE 100 companies registered outside the UK.
Now SPACs are increasingly becoming part of the mainstream for many of these offshore jurisdictions. Whilst SPACs pursuing US targets are still typically incorporated in Delaware, those looking at targets further afield are now considering alternatives with the potential to offer a more efficient post-combination structure to hold foreign assets. Although not every offshore centre fits the bill, those top-tier jurisdictions with legal systems based on common law, such as the Cayman Islands, BVI, Guernsey and Jersey, can prove particularly SPAC-friendly by offering:
rapid turn-around times for incorporation;
unrestricted objects/corporate capacity;
constitutional documents which can be tailored to suit applicable listing rules and sponsor/investor requirements;
wide acceptance on the global exchanges, including those popular with SPACs such as the NYSE, NASDAQ, London's Main Market and AIM;
the ability to issue different types of shares and warrants suitable for the SPAC model;
flexible capital maintenance rules permitting distributions to be made and shares to be redeemed or repurchased from a wide range of sources if the company meets applicable solvency criteria;
the availability of a statutory merger regime enabling the SPAC to merge with its target, as an alternative to a more traditional share/asset acquisition;
robust creditor protection (including in relation to the taking and enforcement of security), facilitating the borrowing of additional funds for add-ons/buy-and-builds;
the ability to redomicile to another jurisdiction if required at a later stage; and
experienced offshore professionals well-used to delivering on all aspects of the incorporation, listing and de-SPAC alongside their onshore counterparts.
Wherever they base themselves, SPACs certainly seem to have come of age in 2020. That they have done so during – and perhaps because of - such troubled times, suggests they may well have the resilience to be around for quite some time to come.