RHODEN…a SPAC is used either to raise capital through an initial public offering (IPO) or to take over or merge with an existing business.

EARLIER this year, private company Micro-Financing Solutions Limited (MFSL) purchased 79.08% of publicly traded SSL Venture Capital Limited (SSLVC) for total consideration of $30.0 million. They did this through MFS Acquisitions Limited, a special purpose acquisition company (SPAC) set up to facilitate the transaction. Following the acquisition, SSLVC was rebranded as MFS Capital Partners Limited effective August 18, 2022, where it now trades under the symbol “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, the use of this corporate structure has been common since the 1990s. However, it is the first such entity to be established in Jamaica, a sign of Jamaica’s growing maturity in as a financial destination. A SPAC is used either to raise capital through an initial public offering (IPO) or to take over or merge with an existing business. It does not engage in any commercial activity. SPACs have become a popular alternative for many experienced management teams and sponsors interested in IPOs. This trend is expected to continue as a growing number of private equity (PE) firms, venture capital (VC) funds and operators form more SPACs.

Although the first SPACs were created in the 1990s, it is only more recently that blue-chip investors have started to take a particular interest in them. According to a study of data provided by Dealogic and conducted by PricewaterhouseCoopers (PwC), the percentage of U.S. IPOs conducted by SPACs increased from 4% in 2013 to 30% in 2019. The increase can be attributed to the fact that more prestigious private equity firms, banks and well-known entrepreneurs are forming SPACs. This, in turn, has attracted private business owners who wish to take their businesses public. For example, major investment firms such as Pershing Square Capital Management, Goldman Sachs and TPG Capital are among those participating in the latest wave of SPAC offerings.

SPACs can contribute to the capital

One of these advantages includes better access to capital, because even though some small 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 make acquisitions in order to pursue their growth. . Existing businesses can retain a share of their operations while accessing cash they otherwise wouldn’t have had if merging with a sponsor for a SPAC. Another benefit that can come from establishing a SPAC is that of greater certainty in the market, as stock prices are unpredictable and identifying the optimal time to debut can be difficult and costly. in stock exchange. A company runs the risk of “leaving money on the table” if it is too conservative in its pricing strategy and prices its offer too low. Additionally, the market may have been weak on the day the company went public, which could negatively impact the stock price.

The strategy used by MFSL was a reverse takeover of SSLVC by a SPAC set up by MFSL. This marked an important moment in Jamaican capital markets, as transactions like this have historically been rare, despite being widely used in other markets. This has proven that apart from the conventional IPO and other traditional means of raising funds, alternative corporate finance solutions are available for businesses that operate within the Jamaican economy, achievable by collaborating with brokers such as VM Wealth Management (VMWM) which display a high level of expertise in stock market legislation both in its capacity as adviser and as arranger of this transaction. A high level of innovation, ingenuity and commitment like this is essential to guide companies 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 much less ambiguity because as part of the deal, the target companies have the ability to negotiate the price of their shares with the SPAC sponsor, unlike initial public offerings. usual. In other words, targets can “lock in” a price, which helps protect the value of the asset from market volatility. Other benefits of SPAC transactions include more flexible transaction terms, as in addition to negotiating valuation, SPACs allow target companies to negotiate other transaction terms in their favor. This could involve structuring the deal to bring in more money through a private investment in public funds (PIPE) and adding debt or equity. SPACs also offer target companies access to experienced managers. In this way, SPACS behave much like private equity firms in that a group of investors raise funds to strategically buy companies – the main difference being that the SPAC runs a public offering versus a private offer.

In summary, through a variety of means a company can achieve its key objectives and there is no “one size fits all” for every company’s capital solutions. Therefore, it is more important than ever for companies to think outside the box in order to deliver increased value to their stakeholders and approaching the capital markets for these solutions can prove to be an effective way to do this. Indeed, the traditional routes can be tried, but sometimes it can be advantageous 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. He focuses particularly on the bond market and counterparty credit risk.

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