15 June 2023

‘SPACS: a failed experiment…?’

Het Financieele Dagblad, the newspaper for everyone who matters in the financial sector, called the SPAC craze a ‘failed experiment’ in an editorial today. She writes that it is admirable that the Amsterdam Stock Exchange is open to innovation. This fits well with the exchange’s tradition of pioneering and trying new things.

The newspaper notes that banks and Zuidas offices in particular have benefited from the craze, but investors have gained little from it. The VEB, the umbrella organisation of securities owners, has even called it a risk to the prestige of the Amsterdam Exchange, because the screening of entrants to the stock market is more limited and the risk of ‘skeletons in the closet’ is therefore greater. The stock exchange can boast that through the SPAC route, the necessary new companies have entered the listing and thus it has had the threshold lowering effect. Technology group CM.com, pallet manufacturer Cabka, game company Azerion, medicine developer BenevolentAI, media company FL Entertainment and property fund New Amsterdam Invest all owe their listings on the Amsterdam Exchange to a merger with a SPAC.

But has the experiment succeeded or failed? To better answer that question, it is good to look more carefully at the facts. Since the arrival of the first SPAC in 2018, 20 such ‘moneybags in search of operational activity’ have listed in Amsterdam. Of these, six have succeeded in their bid to merge with a real company, with one more to be added soon, according to latest reports. Exactly the same number of seven SPACS failed in that same endeavour and have since been wound up, while another six SPACS are on their way. Viewed this way, it looks like it is going to be a draw for now.

If we look at it a little deeper, however, the picture looks different. In total, the 20 SPACS raised about €4.4 billion. Of that, through the seven SPAC mergers, some €630 million actually ended up on the stock market, while the seven SPACS that have been wound up and have disappeared together accounted for about €2 billion. That amount never ultimately made it to the exchange. This while the criticism is that the initiators often charged disproportionately high fees before returning the funds to investors. It is also notable that most of the six SPACS still in existence are in a difficult position. They are having a lot of trouble finding a merger partner and, moreover, many SPAC investors have already signalled that they do not want to participate in a merger and want their money back. All signs that detract from the impression of a draw.

And this picture does not get any better if we look a bit further into the SPACS and the companies that arose from them. It should be noted there are also good companies among them. But what are we to make of, say, a SPAC merging with a property fund it set up itself three days earlier? Or what about a company that, of the €415 million SPAC money originally put in at the merger and listing, is left with only €56 million, with one of whose founders currently being investigated by the AFM? These questions all present themselves if you look a little further. In short, it would appear that the critics who say the SPAC route lacks transparency are right. It will therefore be no coincidence that the companies that have listed on the Amsterdam Exchange via a SPAC are currently averaging 44% below their introductory price.

In part, this will be due to the fact that private investors have mostly been unable to subscribe to a SPAC’s listing, partly as a result of the AFM’s order. UvA professor of entrepreneurial finance Arnoud Boot calls this a blessing in retrospect because major mishaps in the Netherlands have been avoided, partly because of it. Conversely, according to some, this also hindered the very success of SPACS because it hinged on tradability, which they thus partly lacked. This was possibly also due to the fact that three quarters of the SPACS came from abroad and were therefore relatively unknown in the Netherlands.

Thus, there is much more to be said about the SPACS phenomenon, but let’s return to the FD’s assessment that it would be a ‘failed experiment’. It should be borne in mind that the essence of an experiment is not whether it succeeds or fails, but that it gives us insight into how a new phenomenon works. One thing became clear in the process. If they are to add value to the Dutch economy and the Amsterdam Exchange on a sustainable basis, SPACS clearly still require critical consideration and further development.