Capital for Champions: SPACs as a Driver of Innovation and Growth
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About this ebook
Europe could be the home of the next generation of global market leaders in key industries of tomorrow. It has leading scientists and entrepreneurs developing state of the art solutions. Growth Capital in significant proportions, however, is only available in the US. With SPACs, Europe has the opportunity to keep its Champions - all that is needed are adequate capital market rules and regulations.
Let's get it done.
Franz Gustav Oertel
Franz Gustav Oertel is a strategy consultant at one of the worldwide leading management consultancies. He holds a BSc in Economics from Ludwig-Maximilians University in Munich and a MSc in Economics from London School of Economics (LSE). Franz Oertel is a politically interested macro-economist with experience, interest and expertise in start up founding and financing. In his dissertation at LSE he focussed on Growth Capital analyzing the potential of Special Purpose Acquisition Companies (SPACs). Franz Oertel works and lives in London.
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Capital for Champions - Franz Gustav Oertel
To my parents
Contents
The Sudden Boom
Growth Capital and Companies
Dissecting SPACs
3.1 Operating Principle
3.2 Key SPAC Market Players
3.3 SPACs on Trial
3.3.1 Historic Performance
3.3.2 Market Forces
The Overlooked: PIPEs
Intermediate Conclusion
SPACs in Europe
6.1 Prerequisites
6.2 SPAC Market: Status Quo
A Structural Disadvantage
’The Power of PIPEs’
8.1 The Problem - At a Glance
8.2 First Best Solution
8.3 Second Best Solution
8.4 ’The Power of PIPEs’
8.4.1 The Principle
8.4.2 The Implementation
Final Plea
Abbreviations
Appendix
Bibliography
Chapter 1
The Sudden Boom
What a decade it has been.
Still troubled from the 2007 financial crisis, Europe drifted straight into the next one - the Euro crisis. Central banks pumped trillions of dollars into the market. Interest rates were at zero, real interest even negative - money was free. But still, inflation remained low. We witnessed a never-before-seen era of low interest rates.
In this era, private capital searched for new attractive investment opportunities. And over the course of 2020 and 2021, they seemed to have been found in SPACs. In the news, SPACs were often referred to as blank-cheque companies. Being mostly covered with negative connotations, some saw in SPACs all the evil things of turbo-capitalism combined. Some predicted them to be the trigger of a new 2007 financial crisis. Some postulated that they were merely a shortcut to the capital markets for low-quality and financially troubled private firms.
In these news articles, journalists often seemed to juggle around with superficial topic knowledge. Instead of explaining their way of functioning and attractiveness to investors and private companies alike, SPACs were repeatedly being warned off as a rip-off for investors. Even among financial enthusiasts and experts in my environment, (nearly) no one appeared to be able to articulate how SPACs exactly worked.
It was, however, undeniable that this niche financing vehicle was attracting record amounts of investments. In 2020, they accounted for more than 50% of all US IPOs. And just in the first four months of 2021, they raised over $100bn¹. In comparison, €79.1bn were raised in Europe through IPOs over the years 2018, 2019, and 2020 combined (€36.7bn, €22. 1bn and €20.3bn, respectively)². While SPACs were taking off and booming in the US, there was one very bizarre thing: They were almost non-existent in Europe.
So, there was a financing vehicle raising more in four months than all European IPOs over three years combined - but not only did no one seem to know how it really worked, its boom and hype did also seem to be unique to the US.
But why?
That triggered my research. I dug deep into the topic. At first, I did not nearly recognize the scope, actuality, and importance of the matter I was working on. Analyzing the reasons for their dynamics in the US and their non-existence in Europe became the focus of my work. Soon, it was clear: Europe has a substantial Growth Capital problem. With leading scientists, engineers, and entrepreneurs, a relatively strong economy, and 420m people, there is no reason why global leaders in platform markets and fast-growing industries should not be based in Europe.
But the fact is, they are not. Europe’s weak equity financing environment can explain this to a large extent. Substantial amounts of risk capital are needed to grow a company with a good idea into a global champion. Unfortunately, in Europe, risk/growth capital is not available on nearly the large scale required. As a result, European high-potential companies are forced to seek financing abroad. Their equation is straightforward: Why trouble yourself finding investments in Europe when you can easily find funding in the US at a valuation up to 10 times as high?
This weakness of Europe comes with a price. A substantial one. High potential companies are drivers of innovation and growth in an economy. Forcing them abroad translates directly into slower economic growth.
But there is light at the end of the tunnel. SPACs might be the solution Europe so desperately needs to keep the high potential companies. SPACs - together with PIPEs (Private Investments in Public Equity) - might be able to circumvent the weakness of the European equity market and provide Growth Capital on a large scale. SPACs and PIPEs can be utilized to provide capital for champions. Unfolding their power should be a priority in Europe’s economic strategy.
Unfortunately, only a few have realized the potential of SPACs up to now. And it appears that (most of) Europe’s politicians, regulators, and journalists do not seem to belong to this group. There are unnecessarily tight regulations in place. There are too many poorly researched and misleading newspaper articles wrongfully warning of SPACs.
All around the world, regulations are being adjusted and changed to allow fair SPACs to unfold their powers. For example, in 2021, the UK passed major regulation adjustments to simplify SPAC launches, capital raises, and mergers. In the Netherlands, Amsterdam is positioning itself as a European SPAC hub with attractive regulations. The latest example is Singapore - where regulations were changed in September 2021, and the government launched