Podcast: The European SPACs Boom and SS&C Intralinks Deal Flow Predictor

A discussion on the European SPACs boom and the Q2 Deal Flow Predictor.

This episode discusses the global SPACs boom and how it's picking up in Europe. Plus, hear an interview with the co-heads of SS&C Intralinks, Ken Bisconti and Bob Petrocchi, discussing the latest SS&C Intralinks Deal Flow Predictor.

In this podcast, you’ll hear about:

  • The popularity of SPACs in the U.S. market
  • Why SPACs are gaining momentum globally
  • Where the M&A market is headed in the next six months, according to SS&C Intralinks' data

Transcript

[MUSIC PLAYING] JULIE-ANNA NEEDHAM: Welcome to Dealcast, the weekly M&A podcast presented to you by Mergermarket and SS&C Intralinks. I'm Julie-Anna Needham. In this episode, we're examining one of the biggest corporate trends of the last 12 months. The boom in special purpose acquisition companies or SPACs. We're also finding out what the SS&C Intralinks Deal Flow Predictor using data from the due diligence platform has revealed about the SPAC trend and other M&A trends globally.

Firstly, I spoke to Sofia Cerqueira, Mergermarket ECM editor for EMEA. Hi, Sophia. Thanks for joining us today. Can we start by looking at why SPACs have become so popular in the last year?

SOFIA CERQUEIRA: Yes, SPACs, they are not entirely new, but they've been going through a huge boom. It's a combination of drivers, really. We have, on the investor side, lots of dry powder to be deployed and very low yields elsewhere. Fewer and fewer companies on the stock market. So fewer opportunities there. The IPO process, as well in the US, is seen as quite cumbersome and not particularly good at finding the right valuation for companies. So there's a lot of money left on the table. And this also sort of sense of security for investors because the way a SPAC works means that they can always get their money back if they don't vote for the-- if they don't like the target that is being acquired.

And then, on the other side, you have the issuers finding SPACs as effectively just another tool to raise and deploy capital efficiently and find companies to acquire. And then for companies themselves to be acquired by SPACs is a much more effective way of becoming listed without going through that cumbersome IPO process. So it's easier, quicker, and cheaper for them to have bilateral talks with us by vehicle than to go through a traditional IPO process.

JULIE-ANNA NEEDHAM: And it's been something we've seen a lot of in the US, and it looks like it will be moving across the Atlantic to Europe. What evidence are you seeing of a SPAC boom in Europe? And will the changes or potential changes to London's listing rules increase the chances for SPAC activity in London and the UK?

SOFIA CERQUEIRA: Yes, we are-- we've been monitoring the boom in the US closely, and we're sort of expecting that in Europe, as well. We're definitely seeing signs of an uptick in activity here, with already have a few listed SPACs mainly in Amsterdam, but also there's been an announcement recently in the Nordics, also, one in Paris. And so, we talk to advisors who are creating SPAC dedicated teams. We talk to private equity and corporates who are assessing raising SPAC money.

So there's definitely a lot of movement there. And we expect, we heard, for example, up to 15 new vehicles listed by the end of the first half of the year. So nothing like the US but definitely growing numbers. Now, what happens in the UK compared to the rest of Europe that's a really interesting point because of the UK regulation-- the existing regulation. It is more difficult. SPAC can be done definitely, but it is not as flexible as elsewhere. Now those listing rules are being reviewed, and they expect to be changed, and that might happen towards the end of this year.

So after those regulations are simplified, and for example, shareholders can vote on a SPAC target being acquired, which is not an option now and shares are as not suspended as they are now, then we'll probably see more SPAC activity in London. Now, the question that some people ask is whether there will be too late and whether London will have missed on the SPAC train because during this year we will likely see that activity going elsewhere, namely, to Amsterdam. And that will possibly become the SPAC hub of Europe. So that's an interesting one to follow and see sort of where the tide goes.

JULIE-ANNA NEEDHAM: And what about cross-border activity? You've mentioned a few countries there. What kind of cross-border activity are you seeing in the SPAC space?

SOFIA CERQUEIRA: So in terms of cross-border activity, it's been mostly about US SPAC vehicles looking-- increasingly looking at Europe when they are searching for targets. That are more than 400 SPAC vehicles looking for targets in the US alone. And so, it's definitely a seller's market, and there are lots of companies in Europe, especially companies that have already thought about potentially being listed or doing an IPO or attempted an IPO in the past, and they are great SPAC targets. And they are definitely talking to lots of US acquirers. So in terms of cross-border activity, that has been the main sort of highlight across the pond. Let's put it like that.

JULIE-ANNA NEEDHAM: And what about the sectors that are seeing the most activity. I've noticed that there are quite a few that are looking to target electric cars or companies linked to electric cars-- such as mining focus on battery metals and autonomous vehicles.

SOFIA CERQUEIRA: Yes, anything related to sustainability, to energy transition, green themes that is very high on the agenda pretty much everywhere-- traditional IPOs, M&A but of course also on SPACs. There's a huge-- there's huge potential there. Now, if we think of SPACs and the kind of companies that people are willing to put money in, one of the key aspects is that often investors are more willing to invest in something that has forecast of growth and not yet evidence of profits or a sort of very strong track record.

And so, for those companies and those particular spaces where it's more about the potential of growth rather than the profit that is already there, that's a perfect fit for SPACs. So we have a lot on anything related to air taxi companies and batteries, electric vehicles-- those are definitely themes. Anything within an ESG stamp is definitely something that we're seeing a lot on SPACs. There is, for example, one in 2MX Organic in Paris they are looking to acquire a company or targets in the organic consumer space. So there's also that ESG element there. And ESG Core Investments in Amsterdam also looking for a sustainability-related target, for example.

JULIE-ANNA NEEDHAM: And do you think they could become -- a SPAC could become one of the main routes to market for companies looking for a quicker and less onerous way to being listed.

SOFIA CERQUEIRA: Well, the jury's out whether there will be the main route, but they will definitely be another route that was in front of-- was there but wasn't in front of mind, and now it definitely is. When we talked to advisors looking at these processes, they are saying that whether-- before they were looking at a dual track, potentially selling to private equity or private trade buyer and looking at a listing at the same time.

Now, they're often looking at a triple track, so the SPAC route is there from the beginning and is a very feasible and very pretty serious option that is there. Effectively, almost any company that is an immediate target and that could be considering an IPO would be a SPAC target. So that is definitely that, and that will be the case for some time, given the amount of vehicles looking to acquire.

JULIE-ANNA NEEDHAM: So what's the appetite from European fund managers to invest in SPACs. I think some London-based fund managers might remember that it wasn't that long ago that the Indonesian mining company Bumi which started out life as a cash shell or a SPAC by Nat Rothschilds and delisted a few years later at a fraction of its original value with lots of controversy related to corporate governance and ownership. Do you think that's going to put some people off investing-- some fund managers off?

SOFIA CERQUEIRA: So one thing I'll say, I think European fund managers are definitely interested, and they're very much looking to jump on board and see what are the opportunities there. Now, in Europe in particular and in London specifically, I think definitely people will have that in their memories and will be particularly cautious about that. That relates to the sectors they are looking at. So they will be quite careful about the sectors they're looking at.

But there's also the fact that just because it's a SPAC, it doesn't mean it doesn't have any corporate governance requirements, or it doesn't mean that any investor education there. It's not the same as the traditional IPO process, but there's definitely a chance to look into the companies being acquired, and especially if there is a vote on those companies being acquired, then investors will get a say on that. It will depend on the sectors that are being looked at again. If we have this growing ESG element and sustainability linked element, I think that might be something that investors can overcome. They will definitely have a-- I don't think it will put them entirely off, but they will probably be more cautious on that front.

JULIE-ANNA NEEDHAM: Great, thanks, Sofia.

SOFIA CERQUEIRA: Thank you.

JULIE-ANNA NEEDHAM: That was Sophia Cerqueira, Mergermarkets ECM editor for EMEA. SS&C, the Intralinks latest Deal Flow Predictor, based on data from the company's due diligence platform, highlighted a number of other trends in M&A. I spoke to Ken Bisconti and Bob Petrocchi, co-heads of SS&C Intralinks, to find out more. So let's start by looking at an overview of M&A activity globally. What did you see in the last quarter of 2020, and what are you expecting to see in the early part of 2021? Bob, perhaps you can start with that one.

BOB PETROCCHI: Yeah, through a turbulent year. I mean, obviously, Q2 was a very challenging quarter for the market, but through all the challenges, the M&A market ended up at a high. We think leading into '21 it's a great time of opportunity. So there's a lot of confidence in the market from Q4 that definitely bled over, and we're seeing a pretty significant uptick in Q1 deal volume. So there's no question about that. Our Deal Flow Predictor is pointing to better than a 10 percent growth in the M&A market for announced deals in Q2. So it looks like the momentum is going to continue. A lot of confidence, a lot of resilience in the market. Ken, I don't know what your thoughts are.

KEN BISCONTI: I just echo that. I think we all saw that there were a lot of-- either deal hold-offs or deals dying and in Q2 of last year. But we were probably all positively surprised by the resilience of the market that came roaring back in the late summer and has continued even into the early part of 2021 so far. So it's been very positive.

JULIE-ANNA NEEDHAM: And looking at the different regions, can you talk us through what's been happening in the APAC region and which sectors saw the most activity there, Bob?

BOB PETROCCHI: Sure, I think along with North America, APAC is definitely leading in global growth. What we're hearing from sources like EY and the Conference Board-- that the tighter controls they had around COVID in containing the transmission, it definitely increased to-- it led to increased customer confidence and just more dealmaking. So on top of the increased traditional dealmaking, they've also seen a boom in the IPO market. So and China is leading the way there. So just a lot of activity overall in Asia-Pac for sure.

JULIE-ANNA NEEDHAM: And turning to you, Ken, in the EMEA region, what activity and trends are you seeing there?

KEN BISCONTI: Well, in EMEA, despite the sheer number of lockdowns across EMEA and made more complicated by the number of countries with varying approaches and issues, the region has been trending relatively flat from 2019 to 2020 and into-- going forward. Now, late to the IPO boom, EMEA is actually signaling it's not going to sit out the year. There have been already impressive listings in 2021, including Dr. Martens and Deliveroo. We see upcoming legislative changes in the UK, such as the introduction of dual-class structures, making London even more attractive for new issuance.

Now, based on the Deal Flow Predictor EMEA IPOs came in pretty strong in Q4-- actually nearly quadrupling the number of IPOs we saw getting started in Q4 the year before. Our Q2 2021 M&A prediction for EMEA lands roughly between minus 5 percent and plus 5 percent growth. Now, that's compared to what was predicted in Q2 of 2020. And of course, we know that a number of Q2 deals in 2020 were unexpectedly halted.

So we're actually anticipating the actual numbers to hit at the higher end of that spectrum even though it's minus 5 percent to plus 5 percent. We fully expect it'll be at the higher end of that spectrum as COVID begins to wear off-- some of the dealmaking hesitance. And on the bankruptcy front, we have not been seeing the influx of distressed deals coming to market-- expected likely in that region due to moratoriums that there were imposed in the region.

JULIE-ANNA NEEDHAM: Yeah, and it was certainly something-- there was a ban on redundancies in Italy that I'm aware of. And I think in other countries, as well. And looking at North America, we saw a lot of early-stage deal activity. What are the big trends have you seen in the North American region, Bob?

BOB PETROCCHI: Well, I think Ken touched on it a bit. We have the adverse in North America than you do in EMEA and APAC because there is no regulations or protections against insolvency. So we've seen a big steady flow into the US markets with both bankruptcies and in insolvency. So that trend continues for sure. We've seen it through most of the second half of '20 and into the first quarter of '21-- similar range between negative 5% and plus 5% growth in that space in North America.

So that's definitely going to play a part, and probably Q2-- from what we're seeing in the DFP, growth should be about 10% with distress volume. So it's significant. We touched upon IPOs it's certainly a hot market, and I know you guys have been talking a lot about SPACs, but that's driving it. We're also seeing De-SPAC activity in the market, which is interesting, but there's 360 IPOs this year compared to 480 for the entirety of 2020. So definitely some increased volume there.

JULIE-ANNA NEEDHAM: And just looking at that SPAC boom in a bit more detail, it's something that we heard from Sofia about earlier. From your perspective-- but what has driven this massive increase in the number of SPACs over the last year?

BOB PETROCCHI: It's just simply too much cash in the market right now. It's a seller's market, valuations are super high, and SPACs are relatively easy to form. You can get it done quickly. You can raise cash. And you can close on a deal faster. So they're very agile. Equity capital markets are booming across the globe. So there's a lot of private equity companies that want IPOs but IPOs immediately. So there's plenty of cash sitting around, and private companies with favorable valuations are looking to exit quickly. So it's a perfect marriage right now.

JULIE-ANNA NEEDHAM: Looking at Latin America, we also saw a high level of early-stage deal activity there. Can you tell us more about that and other trends in the region there, Ken?

KEN BISCONTI: Yeah, happy to. I think, first of all, it's important to remember that as a whole, LATAM is the most susceptible region that we've seen to geopolitical and economic swings. But that said, they've been able to minimize the impact of COVID, at least on M&A and capital markets. When we look-- year on year to our Q2 predictions for M&A, the region is actually in a positive range with a 5% to 10% upside.

And surprisingly, we're seeing even greater than 10% growth in both M&A and IPO volume in Brazil. And that's despite COVID recovery challenges, these numbers are pretty remarkable, which makes us ask almost like, how is this happening? And I know there's a lot of market speculation on that. There was a Reuters article recently that relayed the impetus that's been driving capital markets in Brazil is -- just as in many other areas the investor need for growth outside of fixed income returns. And so, positive surprise in LATAM and expected to be quite strong year on year.

BOB PETROCCHI: It's interesting-- we have a strong business in LATAM. We've been operating there for over the last 10 years, and one thing that's constant is that geopolitical unrest is always the flavor down there. So I think the region has become resilient, and they're used to operating in such.

KEN BISCONTI: Not a new topic for them.

BOB PETROCCHI: Not at all. They know how to operate.

JULIE-ANNA NEEDHAM: Looking at some of the sector trends, technology obviously had a great year last year with a pandemic with trends such as homework and online shopping. But some of the big tech stocks have seen exponential growth in recent years. However, there are some clouds on the horizon for a lot of those businesses with global regulators looking at how to better restrict their market power. How are these antitrust probes in the US, China, and Europe likely to impact M&A in the tech sector.

KEN BISCONTI: Well, Julie-Anna, it's a great topic. There's been a lot of interest in this. And as a result of that interest, there's actually a specific spotlight in the DFP report on this topic. Regulatory decisions and antitrust probes are likely to have an impact, as you mentioned, on the sector. And in fact, recently, we held an M&A virtual summit at Intralinks where there are a number of experts and legal experts in this area discussing that topic that the general consensus was that we shouldn't expect seismic change at least immediately.

But there are a number of people obviously watching recent nominations to the FTC and in any sea of advocates that are advocating decentralization of big tech, as well as the recently proposed Klobuchar bill. And that can shift antitrust laws in a way favoring potentially more activity and maybe even break up activity in that sector. So more to be said there, but at least from the DFP, we see in that early stage M&A is continuing to outpace the volume from last year. And dealmakers aren't showing any sign of retreat from approving new deals from FANG and others in big tech.

JULIE-ANNA NEEDHAM: Great, thank you both very much.

KEN BISCONTI: Great, thank you.

JULIE-ANNA NEEDHAM: That was Ken Bisconti and Bob Petrocchi, co-heads of SS&C Intralinks. I'm Julie-Anna Needham. Thank you for listening to this week's episode of Dealcast presented by Mergermarket and SS&C Intralinks. Please rate, review, and subscribe to the podcast. You can find us on Apple Podcasts, Spotify, or look out for your Mergermarket news alert. For more information, check out our show notes. Join us next week for another episode.

5 April 2021