SPAC: Europe is catching up on the blank check bet | Company | Economic and financial news from a German point of view | DW

PSPCs – shell companies that raise billions of dollars to buy private companies and get them public – have been described as ranging from “revolutionary” to “the most obscene type of investment.”

Known as blank check financing, some $ 83.3 billion (€ 69.98 billion) was raised last year to allow 248 PSPCs to register through public offerings. initials (IPO).

Perhaps SPACs, or special purpose acquisition companies, should be called blind investing because when you invest money, you don’t know which business you are buying. The PSPC manager generally has two years from inception to find its buyout target and complete the transaction.

Investments, however, allow high-growth startups to register faster and more cheaply in financial markets than traditional IPOs.

“PSPCs are a good funding vehicle, especially for technology companies,” said Norbert Kuhn, head of corporate finance at German think tank Deutsches Aktieninstitut. “But we’re not denying the inherent risk to investors,” he told DW.

“They [investors] confidence in the reputation of the initiator of PSPC. They are very experienced and have a list of potential companies they could invest in, ”added Kuhn. But the risk increases if, for example, a PSPC manager panics as the deadline approaches and buys a lower quality business.

PSPCs first appeared two decades ago, but have gained traction over the past two years, particularly in the United States where 525 have been listed to date. Five of the eight European SPACs launched last year have also chosen to list on the US stock exchanges.

PSPC investments lose their luster

Europe is now starting to take this alternative investment vehicle seriously, thanks to increased investor appetite and regulatory changes. The timing, however, couldn’t be worse, as PSPC’s investment in the United States has just hit the skates. A major PSPC index fund is currently trading at 20% from its February high.

Investors, who initially bought into rumors of deals involving high-quality startups, are now demanding a closer look at these companies’ earnings targets. The use of celebrities to promote certain PSPCs, including rapper Jay-Z, NBA star Shaquille O’Neal and singer Ciara Wilson, even triggered a warning from the US financial markets regulator. Legendary British investor Jeremy Grantham went further, warning last year that “PSPCs should be illegal”.

Concerns have led to questions as to why European capital markets are so eager to join the PSPC hype. Even the new head of the European Union’s securities watchdog admitted that Brussels must first study the rise of PSPCs in the United States.

“We have to understand why they are so popular, why people provide money only on the basis of the names of the sponsors and the announcement of a project,” said Natasha Cazenave, executive director of the European Human Rights Authority. financial markets (ESMA). European Parliament in April.

European startups sued by American PSPCs

Despite fears that the SPAC boom is over, many U.S. blank check companies continue to see their stocks skyrocket, including risk analysis firm Open Lending, sports games startup Draftkings, and gadget retailer. Betterware de Mexico, all of which have doubled in value over the past year.

European interest in PSPCs has also been heightened as domestic startups have fallen prey to US-based blank check companies. These include German air taxi maker Lilium and biotech company Immatics, which have already been merged into NASDAQ-listed SPACs.

With competition intensifying, 17 European PSPCs are in the works for this year, worth $ 2.2 billion, according to market data firm Pitchbook.

Amsterdam has so far beaten competition from other European markets to launch the highest number of SPAC IPOs, as its regulatory environment is most similar to that of the United States. Britain, meanwhile, is set to announce reforms that will allow London to be a hub for SPAC registrations.

The three SPACs listed on the Frankfurt Stock Exchange are based in Luxembourg due to the country’s favorable regulatory regime.

“It’s legally more difficult to set up a PSPC in Germany and parts of Europe due to the issue of legal structuring – whether you’re building a business or an investment fund – which comes with its own set of regulations.” Credit Suisse’s Joachim von der Goltz, head of ECM Northern Europe, recently told Reuters.

Are European investors too cautious?

Europe still has a mountain to climb to meet US demand for PSPC investments. Despite the desire to have more European tech giants and ambitious post-pandemic infrastructure spending plans, especially on green investments, Europe still lacks the necessary investment landscape.

“Wall Street has a lot of capital available for SPACS and IPOs and this encourages specialist investment knowledge,” Goltz told DW, adding that European investors are still too risk-averse.

Deutsches Aktieninstitut is calling for reforms to the German pension system to allow more funds to be invested in capital markets, which it says will boost startups and PSPCs / IPOs. Germany operates a pay-as-you-go pension scheme, where current retirees are paid out of premiums paid by those still working.

“We need to strengthen the [capital markets] ecosystem, to raise more money, especially through the pension system, to help launch IPOs and SPACS, ”Kuhn said.

He said that German Chancellor Angela Merkel’s center-right Christian Democratic Union (CDU) party, the Greens and the business-friendly FDP have proposed opening up the pension system to capital markets. But no decision is likely until the federal election on September 26.