Xavier Rolet, the former CEO of London Stock Exchange Group, jumped into the boom of “blank check” companies. But instead of going public in London at his former employer, the special purpose acquisition company (SPAC) he joined raised funds in New York.
“The US market is really the market that knows how to gauge future growth,” he said in a phone interview. And regarding SPACs: “It’s a structure that gives you the speed, the ability to invest and helps convert and monetize some promising private companies that have successfully positioned themselves to take advantage of technological changes in a post-Covid world,” Rolet said.
SPACs have been on fire in the United States, bringing in more money last year than in the entire previous decade. They are called “blank check” companies because they get funds from investors in an IPO go out and find promising investment targets. And while Rolet thinks SPACs will remain popular in the US, he says there will have to be changes in Europe before tech investment catches up across the Atlantic. The United States had more than 190 SPAC deals last year, according to Refinitiv data. Europe had three.
Rolet is one of the directors of Golden Falcon Acquisition Corp., a SPAC which raised $300 million on the New York Stock Exchange late last year and focuses on tech and fintech targets based in Europe, Israel, the Middle East or North America, according to a filing. Makram Azar, a former executive of British bank Barclays and private equity firm KKR, is the chief executive of Golden Falcon.
SPACs have been around for years, but their popularity has exploded along with a wider frenzy in IPOs. After raising funds through a public offering, the funds are held in a trust account, where they can typically remain for 18-24 months while the SPAC looking for an acquisition. Shareholders can vote against the deal if they don’t like it and get their money back. Investors may receive interest on their funds during research.
SPACs haven’t always been a good deal for people betting on them—research suggests that many end up trading for less than their IPO price. Typically, they are structured in such a way that the management team gets shares that dilute investors’ participation, and investment banking fees also eat away at their investment. That said, blank check companies have lately attracted high-society management teams with Fortune 500 leadership experience. Harvard Law research indicates that transactions sponsored by higher quality managers tend to perform better, and some recent structures have been more investor friendly.
Why Europe doesn’t have a SPAC boom
But Rolet, a Frenchman who started his career in finance at Goldman Sachs, doesn’t think Europe will get its own SPAC boom for tech companies until there are regulatory and tax changes.
“Europe just doesn’t have the equity capital markets that understand and value innovation appropriately,” Rolet said. “And as a result, it continues to suffer significantly in terms of retention of tech companies because they have an easier time growing in the United States.”
Rolet led the London Stock Exchange Group for almost a decade, and he has a lot of good things to say about entrepreneurship in Europe – “the targets in Europe, clearly, are many,” he says. He even thinks that there is a lot of capital. The problem, he says, is that institutional investors in the EU lack the expertise to invest in technology. The tax system encourages debt investments and may penalize equity investments. Regulations make it difficult for insurance companies, for example, to increase their equity holdings. He says that’s why big institutions lack the talent and know-how to invest in next-gen tech startups.
“I’m not talking about family offices, private banks, they understand that because that’s how they make their money,” he said. “But institutions lack expertise in technology. They really do, overall, compared to the United States.
Funding and opportunities for cash mega towers, is seen as one of the main reasons Europe hasn’t spawned a tech titan the size of Google or Tencent. But there are signs that the region has recently narrowed the gap. After a ‘lost decade in the 1990s’, the share of European tech companies in global market capitalization has increased over the past 20 years, according to data compiled by Atomico, a venture capital firm. The company’s research shows that 15 of the 16 European companies that have added more than $1 billion in market capitalization in the past five years have done so from a European public market.
Alex Watkins, co-head of equity capital markets in Europe, the Middle East and Asia for JPMorgan, said the pipeline for European IPOs this year is “weighted towards growth companies, with a strong representation of technology”. He says SPACS will be a big topic in 2021. “They’re definitely coming to Europe,” Watkins said.
Goldman Sachs analysts believe the European tech economy is “at a tipping point,” according to a research report released this month. The investment bank cited a more favorable situation political backdrop, the digital acceleration of Covid and a faster pace of venture capital investment, which has doubled in the past three years (although still three times lower than in China and the US) . At least 20% of funds from the EU’s €672.5 billion ($818 billion) Recovery and Resilience Facility, which is designed to help the region’s economy rebound from the pandemic , are intended for digital transformation.
In the UK, a lot of hope is placed on the government list review. Post-Brexit Britain has little scope for agreement for financial services with the EU, and a revamped market for IPOs could help the country compete with mainland markets as well as those in Hong Kong and New York. The review will look at things like dual-class shares, which some tech founders have favored as a way to keep control of their businesses.
Alasdair Haynes, founder and CEO of European stock market Aquis Exchange, said he would make SPACs a topic of discussion in the review. “We support Spacs,” he said.
For Rolet, the UK review highlights the promise of the SPAC boom. “The fact that the UK is responding and looking to upgrade and modernize its own regulatory framework is a testament that this is going to be with us for some time to come,” he said. “It will only work in markets where there is a large pool of sophisticated investors, who really understand the technology. You can have the perfect, most competitive regulatory framework, but if you don’t have the investors, if the understanding of technology and innovation is not there, the liquidity will be elsewhere.