How US SPACs rocket has failed to take off in Europe

I get an email almost every morning from some SPAC seller telling me to do a SPAC with them," said Johnny Boufarhat, CEO of Hopin, a virtual events platform. "It's interesting, but it also doesn't make sense for us."

Instead, Boufarhat said he wants his London-based company, which is valued at $5.65 billion, to be ready for a traditional initial public offering (IPO) later this year or in 2022.

Hopin is one of several leading European startups, also including Europe's most valuable fintech startup Klarna, that told Reuters they are steering clear of SPACs, or special-purpose acquisition companies, the hot new method of floating a company that has taken the American tech world by storm.

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Their caution, driven by fears over heavy costs and regulation, underscores the potentially risky nature of this innovative form of financial alchemy, although bankers said the market was in its infancy and much could change in the future.

There have only been 10 SPAC listings in Europe in 2020 and 2021, with a total value of about $1.3 billion - figures dwarfed by the United States where 522 such listings have brought in over $300 billion, according to data compiled for Reuters by Refinitiv.

SPACs are shell corporations that list on stock exchanges and then merge with an existing company to take that target public without it going through the conventional IPO process.

Such deals have emerged as a form of public market venture capital for some startups that have struggled to raise funds through traditional routes. But they can carry a heavy cost, typically 20 per cent of the equity of the acquired company - which goes to the sponsors, or promoters, of the deal.

European reluctance among both companies and investors partly reflects the relative maturity of the region's tech startups before they go public, compared with US counterparts, according to Reuters interviews with more than 20 entrepreneurs, investors, lawyers and bankers.

For example several "unicorns" valued at over $1 billion, such as Swedish fintech firms Klarna and Trustly and London-based Wise, have years of operating history and healthy financials with little incentive to bear the extra costs of a SPAC deal.

The average age of venture capital-backed startups going public last year was 10.5 years in Europe, nearly double that of the US ones, according to data from Refinitiv.

'No one has convinced me'

Klarna, founded in 2005, told Reuters it aimed to list late this year or more likely in early 2022 and favoured an IPO, rather than a SPAC.

"No one has yet convinced me about why that would be a preferential route," Klarna CEO Sebastian Siemiatkowski said.

Two sources close to Trustly said the 13-year-old company would likely go public later this year via a traditional IPO. Money transfer startup Wise, launched in 2011 and formerly TransferWise, is also not keen on a SPAC deal and wants to IPO in London this year, according to a person familiar with the matter.

Trustly declined to comment.

As a result of such resistance among established firms, some investors said that many companies that turned to SPACs could be untried and thus risky propositions, and expressed concerns about an eventual dotcom-like bursting bubble.

"The danger is that the SPACs will merge with businesses that are not ready to be public and if you're not ready to be a public business you end up disappointing at some point and you end up losing people's money," said Harry Nelis, a London-based investor at venture-capital firm Accel Partners.

Several investors said differences in US and European listing rules were also playing a significant role.

Generally US exchanges are more SPAC-friendly, allowing shares to be held in escrow until an acquisition is made, when investors have the option of getting their money back if they don't like the target company.

Major European exchanges don't allow that, although such regulations are expected to be eased in places like London and Amsterdam. For instance, a rule in London that suspends a SPAC's shares after it picks up a target is widely expected to be relaxed for investors, whose money can currently get locked up.

Conversely, Pär-Jörgen Pärson, general partner at Northzone, which has invested in companies like Spotify and Klarna, said heavier American regulation around traditional IPOs were also encouraging startups and investors to explore SPACs there.

"The European listing rules are not as draconian as in the US so I don't think a SPAC has the same relative appeal to conventional methods as in the US where you circumvent more of the red tape associated with an IPO filing," he added.

'We'll see a record number'

However, SPACs proponents believe they will find their place in Europe among tech and biotech companies working on futuristic products. IPOs, unlike SPACs, cannot be promoted on the basis of future profit promises.

"You will see a lot of life science companies, a lot of electric vehicle companies and nascent technologies going public via a SPAC because you are allowed to talk about forecasts, because it's an acquisition," said Rosh Wijayarathna, head of corporate finance EMEA at Silicon Valley Bank.

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German air taxi startup Volocopter Chief Executive Florian Reuter told Reuters that the company was considering a SPAC deal as an option, but gave no timeline.

SPACs were pioneered in the early 1990s but have only attracted consistent mainstream interest in the United States in the past 12-18 months, driven by deals for the likes of DraftKings and Virgin Galactic. The current boom is unprecedented and at historic levels.

Financier Nathaniel Rothschild, scion of the famous banking dynasty, was an early SPAC promoter whose investment shell Vallar raised $1.1 billion in 2010 to merge with coal producer Bumi.

"I think the big difference between what we tried to do, and the vast majority of SPACs today, is we wanted to buy a business and stay with it," Rothschild told Reuters. "Many of these SPACs - they're just promoters and when the merger is done they will leave."

Yet Berthold Fuerst, co-head of investment banking in Europe at Deutsche Bank, pointed out it was still early days for the European SPACS market and that it was tough to predict how it would develop.

"Six SPACs were launched in Europe this year, as many have announced the plan to do so as well," said Berthold Fuerst, co-head of investment banking in Europe at Deutsche Bank. "Overall, we will see a record number (of SPAC issuance in Europe), even if the actual volume will be well below that in the U.S."