A special purpose acquisition company, (SPAC), is a publicly traded shell company created with a purpose of purchasing a future target. The Canadian SPAC is modelled largely off of the US model. One of the many important characteristics that is shared between both jurisdictions is the defined timeline to make an acquisition. In a SPAC, the units offered to investors are typically exercisable at a premium to the IPO unit price after a qualifying acquisition is completed.
Interestingly, if a SPAC does not make an acquisition within 36 months after the launch of the IPO, the SPAC is liquidated. A further governance structure in place is the requirement of the approval of the majority of investors to complete an acquisition, which can present a challenge in the context of a three year time line.
Raised capital for Canadian SPACs is at approximately Cdn$1 billion as of 2016. The total value of funds for SPACs that have not completed a qualifying acquisition as at May 31, 2017 is Cdn$455 million. About Cdn$1.2 billion has been raised for all SPACs in Canada as at May 18, 2017. While most investors in Canadian SPACs are institutional investors, these vehicles still pose a risk in terms of their short turnaround time frame, particularly in the context of a smaller Canadian market.
As an example, venture capital and private equity deals provide an indication of the type of market size Canada is hosting:
- Most of the venture capital deals that took place in Q1 of 2017 were in Ontario, at 37 with a total value of Cdn$246 million.
- In 2016, the total number of deals in Canada amounted to 534 deals at a value of Cdn$3.2 billion.
- Private equity deals that are Cdn$500 million and up have been declining since a peak in 2014, with a total of 40 deals between Cdn$500 million and Cdn$2.5 billion.
While the size of the investment for many of the larger deals could be suitable for the current SPAC players in the Canadian space, an increased use of SPACs may run into the issue of a more limited market size for larger, more scalable deals.
Most of the deals in 2016 involved early stage companies. This trend has continued through Q1 of 2017 with the highest number of deals in early stage companies.This means that the clock has to tick longer before a return can be realized. It also means that it may be more difficult to win the approval of the majority of unit holders to move in on these companies, whether at the venture capital stage or as a private equity investment. There simply are not as many larger companies that are prime targets, which means that the success of SPACs in the future may be limited unless the trend for more deals continues. Even in that capacity, the governance structure and time frame that SPACs must follow ensures that these deals have to be of high quality and high potential value.
SPACs can be a useful tool to facilitate acquisitions, yet the current course of modelling the SPACs off of the US model may not be the most suitable approach in a smaller market such as Canada. It is possible that SPACs in Canada may benefit from a greater degree of flexibility in their regulatory structure in order to better adapt to a growing venture capital market, and what appears to be a comparatively stagnant private equity market. Generally speaking, these vehicles need to be aware of the size and type of Canadian investment opportunities going forward.
The author would like to thank Milomir Strbac, Summer Student, for his assistance in preparing this legal update.
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