The exuberance investors showed toward special-purpose acquisition companies, or SPACs, was one of the U.S. business trends of 2020. The last year has seen some of the country’s best-known investors, including hedge-fund owner Bill Ackman and venture capitalist Chamath Palihapitiya, launch SPACs of their own, with Ackman’s Pershing Square Tontine Holdings raising US$4 billion in July, making it the biggest to date.
That excitement hasn’t made it north of the border, however. This year has seen just three SPAC vehicles go public on the Toronto Stock Exchange and Neo Exchange—the only two Canadian exchanges that allow such listings—raising US$555 million. Even on a per-capita basis, the number pales in comparison.
However, a number of Canadian SPACs are currently on the hunt for deals—and their success or failure could determine whether the SPAC craze comes to Canada in 2021.
Hundreds of SPACs went public in the U.S. this year, raising billions. North of the border, there were just three SPAC IPOs, raising a total of $555 million. That was not the case just five years ago, when SPACs were all the rage in Canada, more so than in the U.S. A number of sour deals tarnished the image of this mechanism, but with eight open SPACs on the hunt for deals going in 2021, some believe SPACs could make a comeback.
SPACs are essentially shell companies, or blank-cheque companies that are set up for the sole purpose of raising capital to acquire another company. A SPAC will go through the traditional IPO process of listing on an exchange—usually at US$10 per share. Money raised in the IPO is kept in a trust until the SPAC identifies a target. Typically, SPACs have a two-year timeframe to execute an acquisition; if they don’t, the SPAC is dissolved and investors who bought shares are guaranteed their money back at an agreed-upon rate.
Though they emerged in the U.S. in the 1990s, SPACs were first approved in Canada by the Toronto Stock Exchange in 2008. The first-ever Canadian SPAC, Dundee Acquisition, didn’t go public until April 2015. There were five SPACs listed on the TSX that year, followed by a lull of sorts until 2019, when another five SPACs were listed on the TSX and Neo.
According to data from SPAC Research, by Christmas, the U.S. had seen 247 SPAC IPOs in 2020, raising a total of US$83.1 billion—a sharp increase from the 59 SPAC listings that raised US$13.6 billion in 2019. Canada has seen nothing approaching that level of enthusiasm. Per data from both the TSX and Neo, there have been just 18 SPACs in Canadian capital-markets history, raising a total of about $4.4 billion. However, eight remain open—two on the TSX, six on Neo.
“There’s still a substantial amount of money in escrow waiting to be transacted in Canada,” said Norbert Knutel, a Toronto-based partner at Blake, Cassels & Graydon, who has advised on and acted as counsel to a number of SPACs and their targets. NextPoint Acquisition, the most recent SPAC to go public in Canada, has said that it is seeking target businesses in the alternative-lending and financial-services sector. Most of the other open Canadian SPACs have announced intentions to target businesses in the cannabis space, though investor sentiment toward the sector has waned since the heydays of 2018. However, Knutel said, “Nothing stops them from doing a non-cannabis transaction.” Indeed, while one of the open SPACs, Subversive REIT—which raised US$225 million in an IPO on Neo in January—initially said it would be looking for a cannabis real estate investment, it has since broadened its search scope to real estate companies in general.
“SPACs were perfect for cannabis because the industry was thriving and they’re a faster vehicle, so it made it attractive as a source for the industry to raise capital,” said Michael Auerbach, an investor and founder of Subversive Capital, which sponsors the Subversive REIT. Auerbach’s first SPAC, Subversive Capital Acquisition, was listed on Neo in August 2019, raising US$575 million, and recently entered into a transaction with the rapper Jay-Z, his company Roc Nation and California-based cannabis companies Caliva and Left Coast Ventures to form The Parent Company, which would effectively be acquired by Subversive Capital Acquisition.
“I can tell you that there are a significant number of mid-cap tech companies that are looking for creative, easy ways to go public and raise growth capital,” Auerbach told The Logic, saying he receives “a dozen emails a day” from companies all over the world that want to be acquired by his SPACs.
Knutel, too, predicts that the next wave of SPACs in Canada could very well be in the tech space. “I think in the next three, four or five months, you’ll see a number of qualifying transactions because the timeline for those SPACs will start to run out,” he added.
About five years ago, SPACs looked like they’d be the next big thing in Canada. According to Neo Group president and CEO Jos Schmitt, part of the reason they had a moment was the big names attached to them. Acasta Enterprises, a SPAC that raised $350 million going public on the TSX in July 2015, was backed by an all-star team: Anthony Melman, formerly of Onex, businessperson and former MP Belinda Stronach, Air Canada CEO Calin Rovenscu, the late railway executive Hunter Harrison and former RBC CEO Gordon Nixon, among others.
But the SPAC was essentially a failure for its sponsors and investors, Schmitt said. In the fall of 2016, the company bought two consumer-products businesses, Apollo Health & Beauty Care and JemPak, as well as aviation-advisory business Stellwagen Group, only to see those investments accumulate significant losses.
While Schmitt is confident that “the majority” of the eight open SPACs will emerge with successful qualifying transactions, “there have been very bad experiences in the past with a number of early SPACs; we saw founders losing a lot of money.” The TSX’s first two SPACs, Dundee Acquisition and Infor Acquisition, never successfully found target acquisitions and were forced to dissolve. Acasta was the fourth SPAC to list on the TSX.
Robert Peterman, vice-president of global business development at the TSX, believes one reason Canada sees fewer SPACs than the U.S. is because the TSX offers alternative listing tools, such as capital pool companies (CPCs). Like SPACs, a CPC is a shell company that raises money to go public on the TSX or the TSX Venture Exchange, then looks for an acquisition—usually a small emerging company that needs to raise capital on the public markets. There have been 2,600 CPCs in the history of the TSX-V, according to Peterman.
But Knutel dismisses that reasoning, arguing CPCs are vastly different from SPACs because they are actual shells—they have no money in them (with SPACs, founders front capital first before raising even more capital publicly), and usually target businesses that are worth between $10 million and $20 million. “These deals are typically a lot smaller,” he said.
One shortcoming in Canada is the lack of dealers—larger banks, in particular—that have been involved with SPACs. The big five Canadian banks have yet to become significant SPAC dealmakers, Schmitt said.
RBC Capital Markets has acted on at least four SPAC-related deals over the last three years, none of them involving Canadian SPACs. RBC, BMO and TD did not respond to requests for data on how much they have raised through bookrunning SPAC transactions. Both Scotiabank and CIBC declined to provide comment for this piece, but a source later told The Logic that CIBC is planning to be actively involved in SPACs in 2021.
However, in Canada, Canaccord Genuity is by far the most active investment bank in the SPAC space, both as a sponsor and underwriter, Schmitt said. Because smaller investment firms tend to participate more actively in growth sectors, these firms are more commonly associated with SPAC issuances in Canada. Since 2017, Canaccord has raised total SPAC proceeds of $2.8 billion, of which $191.2 million was raised for Canaccord-sponsored SPACs, according to the firm’s own data. Canaccord’s first Canadian SPAC, Canaccord Genuity Acquisition, ended up acquiring Oakville, Ont.-based energy company Spark Power in 2018. Its second SPAC, Canaccord Genuity Growth, acquired medical-cannabis giant Columbia Care in April 2019, with a market cap now at roughly US$1.4 billion. Its third SPAC is still looking for a target.
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“I think the increase in SPACs that you’re seeing in the U.S. is due to the increase in quality of the SPACs—and also the quality of banks putting them out,” said Michael Shuh, head of Canaccord’s financial-institutions group, and by all accounts a SPAC expert. “You see Goldman Sachs, Citibank and ourselves really backing experienced SPAC management teams, and that in and of itself is the reason there has been more activity … because of really big institutional support for the product.” Goldman Sachs has two SPACs to its name: GS Acquisition Holdings and GS Acquisition Holdings II, the latter of which went public this past June, raising US$700 million.
Indeed, Knutel, the Blakes’ lawyer, said he was seeing an uptick in calls from institutional clients like banks assessing the risks of the mechanism, and whether they should increase their involvement in SPACs. “They are seeing these SPACs grow and everyone is getting huge amounts of money,” he said. “So when that happens, more people get interested.”