An obituary for Canadian SPACs

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A year ago, there was only one story in Canada's market for initial public offerings, and that was SPACs.

Six IPOs for special purpose acquisition corporations were in the process of raising $1-billion.

SPACs boasted a successful track record in U.S. markets for raising cash, then using this blank cheque from investors to snap up private companies. Debuting in Canada, after the introduction of new regulations, they found blue-chip corporate backers – retired executives from Onex, Magna, Royal Bank, Scotiabank, Rogers and Goldman Sachs were believers.

Fast forward to today: Only one of six Canadian SPACs closed a clean, successful deal; a second pulled rabbits out of hats to get an acquisition done. Two others saw proposed takeovers fail. High-profile backers are on the hook for millions of dollars in fees at SPACs that don't get a deal done. And there is not a single domestic SPAC IPO on the horizon.

What went wrong at SPACs, and why is the sector now all but dead in Canada?

First, it's now clear that expectations were too high when SPACs were launched. Raising the money proved far easier than putting it to work. You can even argue the SPACs were victims of their own success. The hype around these companies when they debuted allowed several SPACs to raise more than $200-million; the largest SPAC, Acasta Enterprises Inc., pulled in $402-million.

At that size, the newly hatched SPACs went up against well-established private equity funds and pension plans as they vied for attractive private companies. That competition favoured the incumbents – by their nature, SPACs only do one deal, while large funds are dominant players in Canadian capital markets. The CEO of one investment bank observed that any deal shown to a SPAC "would have fingerprints all over it from Teachers, CPP and every private equity fund."

The second issue for SPACs proved to be the nature of the investors who bought their IPOs. There's an informal group of hedge funds, often called the SPAC mafia, who use their voting power to make or break a deal. This influential crowd proved difficult to impress. In the U.S. market, where SPACs have been around for more than a decade and have raised $34.4-billion (U.S.), one in three SPACs still fail to get a deal done, and end up returning their cash to investors. So the fact that two of six rookie Canadian SPACs successfully closed deals is actually a reasonable batting average.

The two SPACs that did acquisitions are Alignvest Acquisition Corp. and Acasta. Alignvest had a clean deal, with investors blessing plans to acquire Seattle-based Trilogy International Partners, a private company owned by proven telecom executives that runs wireless networks in New Zealand and Bolivia. Acasta faced considerable difficulty in its deal – the company had to raise additional capital to close its acquisitions – but was ultimately able to launch a private equity platform by acquiring two private-label consumer products companies and an aircraft leasing business.

The final issue for SPACs, the factor that may seal the sector's fate in Canada, is the potential cost to founders if the companies don't do a deal. The rules require SPACS to give investors back all their capital if no deal gets done within two years. Founders of SPACs get cheap equity up front, but in return, they are on the hook for the considerable fees paid to lawyers and investment bankers who sold the IPO and kept the SPAC rolling for 24 months.

While the remaining four Canadian SPACs still have several months to announce acquisitions, there is a very real risk that some of these companies will fail to make a deal. That will leave their backers out of pocket for several million dollars. For high-profile financiers, the prospect of losing serious money and earning a reputation for failing to close deals would make SPACs a sector to avoid.