Looser regulatory restrictions around special purpose acquisition companies (Spacs) could have a “significant impact” on the UK financial advice market as investors look for alternative routes to tap into rampant consolidation in the space.
A Spac is a corporation formed for the sole purpose of raising investment capital through an initial public offering (IPO). When the Spac raises the required funds through an IPO, the money is held in a trust until the desired acquisition is made.
The Financial Conduct Authority (FCA) recently announced its final rules for the use of such companies. The regulator says that a Spac will now only have to raise a minimum £100m at an initial listing.
The regulator has also introduced an option to extend the proposed two-year time limited operating period, or three-year period if shareholders have approved a 12-month extension, by six months without the need to get shareholder approval.
The additional six months will only be available in limited circumstances. This is intended to provide more time for a Spac to conclude a deal where a transaction is well advanced.
See also: FCA proposes listing rules shake-up
Impact on advice industry
The wealth management world has recently seen Kingswood set up a Spac. The UK wealth firm reportedly intends to buy solutions provider Lombard International.
If successful, Kingswood’s merger with Lombard would be among the first examples of a UK-based financial services business listing in the US via a Spac.
Now the FCA has changed rules around them, will this have any impact on the UK financial advice industry?
Daniel Baade, chief executive of corporate finance M&A specialist Dyer Baade & Company, told Portfolio Adviser sister title International Adviser: “I expect that the latest FCA release will have a significant impact on the UK financial advice market.
“We have seen a number of PE-backed consolidators entering the market in the last few months. Having a final rule increases certainty for investors and I expect that a number of investors will go down the Spac route.
“This route becomes in particular interesting now as the FCA lowered the threshold from £200m to £100m for an initial listing, which makes it a perfect size for an acquisition vehicle for the UK financial advice market.”
Rules may still be ‘too restrictive’
Joshua Lee, senior broker at M&A consultant Gunner & Co, adds: “It will be interesting to see if Spacs become the mainstay of the financial services M&A space.
“Introducing an option to extend the time period will be seen as attractive to potential acquirers and reflects the timescales needed for many larger transactions in this market.
“The reduced capital requirements may also attract a greater number of firms, however there are many acquisition vehicles growing successfully outside of this approach who may still see the rules as too restrictive.”
Shayne Halfpenny-Ray, public affairs manager of the Personal Finance Society, says: “Despite the eye-watering sums we see in the US with Spacs, the UK market is still relatively small and some of this is put down to the regulatory framework.
“Clearly there is a sense within government and parts of finance that the UK could and should capitalise on this new route for investing in businesses, and certainly there are some advantages of avoiding the more traditional IPO route that this can bring.
“Whether these changes alone will bring forth a slew of new UK Spacs remains to be seen when we consider that in the US 248 Spac vehicles were listed in 2020, raising the equivalent of £63.5bn, comparatively in the UK during the same period, Spacs raised a mere £30m.
“While the US is a different financial animal, it is worth noting that there are signs that the bonanza is slowing down and some even see this as a possible bubble nearing its burst.”
Concerns for retail investors
Outside of potential M&A deals for financial advice firms, the mainstream nature of Spacs means more investors may look to them for their next opportunity.
The FCA says Spacs “continue to have risks and remain a more complex investment, which investors should ensure they can adequately assess and understand before investing”.
It adds: “Investors, particularly individual investors, should carefully consider all available information and risks before deciding whether to invest in a Spac, regardless of whether a Spac has structured itself to comply with our new rules and guidance.”
Amyr Rocha Lima, partner at wealth manager Holland, Hahn & Wills, told IA: “It is extremely difficult to conduct in-depth investment analysis on these investment opportunities because the investments themselves do not yet exist.
“It’s a guessing game based on the individual manager’s, or group’s, past performance, similar to how early-stage private equity and venture capital funds function.
“My concern is that the level of gambling we’re currently seeing in the markets is alarming, and history shows that things spiral out of control when people start handing over their money without distinguishing between legitimate investments and speculative scams.”
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