AJ Bell’s Russ Mould on why loosening regulations for SPACs should be treated with caution

by | Mar 3, 2021

“Lord Hill’s proposals for a new listings regime in London are designed to make it easier for entrepreneurs to access capital so they can invest and hire, open the door to more Special Purpose Acquisition Company (SPAC) deals in London and give private investors much improved access to company flotations. The last one of these is a cause that really does need to be championed, but calls upon the FCA to loosen listing regulations, especially for SPACs, should be treated with caution,” says Russ Mould, AJ Bell investment director.

“On the face of it, moves to boost the City as it fights for market share with Amsterdam, Paris, Frankfurt and other venues in a post-Brexit world seem sensible, as do attempts to allow up-and-coming firms to raise the money they need, as it will give them chance to invest, flourish and reinvigorate the British economy.

“But casual observers who do not work in the financial markets could be forgiven for thinking that this is simply another attempt to loosen well-established rules so that the City and its eco-system of bankers, lawyers, advisers and fund managers do not miss out on the juicy fees which are currently flowing toward New York in particular.

“The Financial Conduct Authority set a pretty depressing precedent when it changed its rules in an (ultimately futile) attempt to get Saudi Arabia’s Aramco to offer a secondary listing in London when it floated on the Riyadh exchange in December 2019.

“The same regulator will now assess Lord Hill’s recommendations and introduce any new rules on London listings by the end of this year.

“In doing so it must consider whether loosening the rules, even with new, specially-designed safeguards in place, is the right path to take for three reasons:

  • A FTSE 100 firm – NMC Health – went bust in plain sight in early 2020, and that collapse came shortly after the failures of both Carillion and Patisserie Valerie
  • One leading US SPAC transaction, Nikola, is already mired in allegations of fraud that have already forced the company’s chairman, Trevor Milton to quit.
  • A surge of interest in so-called blank cheque companies, or SPACs, where a firm is set up as an empty shell, raises cash from investors and then goes out and buys something with it, is often a bad sign when it comes to markets. It can be an indication that animal spirits are running and sentiment is becoming overheated. A rush of SPACs could be seen in the 1720s, when the Mississippi Bubble and the South Sea Bubble were booming, and a repeat occurred as recently as 2006-07, just before the Great Financial Crisis hit home. Increased risk-taking increases the chance of accidents.

“It is therefore to be hoped that the FCA maintains its critical faculties when it assesses Lord Hill’s proposals and the safeguards that he offers alongside them.

“SPAC deals may be booming in the USA right now, but fear of missing out (FOMO) is just about the worst possible reason for making any investment decision. To let this emotion drive a change in the rules with regards to SPACs in particular would potentially expose investors to greater danger and the risk of portfolio losses. Yes, the rules may make it easier for the entrepreneur to raise capital. But is what is good for the seller, necessarily good for the buyer?

“As legendary US investor Warren Buffett once tartly noted: ‘When a pin meets a bubble, investors learn two lessons. First, many in Wall Street – a community where quality control is not prized – will sell investor anything they will buy. Second, speculation is most dangerous when it looks easiest.’

“The FCA’s job is therefore to ensure that quality control remains paramount as it looks to balance the understandable desire to foster the next generation of corporate winners with the need to protect investors, and do so at a time when some corners of the market are looking frothy.”



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