About 2 1/2 years ago, Canadian investment banker Patrick Meneley bumped into Jonathan Turnbull, an old buddy from his days at Salomon Brothers. Mr. Turnbull was in the early stages of trying to figure out how to bring a particular corporate structure to Canada, that of a publicly traded shell company.
"He was working hard on it. He came in with a book. 'Here's the concept. What do you think?' " Mr. Meneley, head of global corporate and investment banking with TD Securities Inc., said in an interview.
The pair joined forces with Stikeman Elliott LLP lawyer Simon Romano and slogged away, eventually succeeding in "Canadianizing" the structure.
In April, the trio brought Dundee Acquisition Ltd. public, raising $112-million and kicking off a mini-boom in special-purpose acquisition corporations (SPACs).
"This was years in the making," Mr. Meneley said.
SPACs are blank-cheque shell companies that raise money in public stock offerings and have roughly two years to make an acquisition. If a deal doesn't happen, the SPAC must return its capital, plus interest to shareholders.
Five Canadian SPACs completed initial public offerings in 2015, raising more than a billion dollars – accounting for about 15 per cent of the entire IPO market. TD Securities was the lead book runner on all but one of the completed IPOs.
"There was very strong institutional support for the SPACs," Peter Miller, head of the equity capital markets group with BMO Nesbitt Burns Inc., said in an interview.
But post-Labour Day, the SPAC market went into a funk. Only one additional SPAC – Kew Media Group Inc. – filed for an IPO. A big part of the malaise was caused by the nasty spike in equity market volatility and investor nervousness that affected the entire IPO market. But another element peculiar to SPACs also played a role.
"Now investors are saying,'I get that. You can raise the capital. Now show me that you can find the targets,' " Mr. Miller said.
Avingstone Acquisition Corp. was the first SPAC to hit a snag. It filed to raise $110-million before Labour Day but was unable to close its IPO within the usual 90 days or so. In December, it pushed out its expected close by three months.
TD's Mr. Meneley agrees that investors need to see a successful acquisition before the market takes off again.
"The next step is that we need to see a SPAC complete a [qualifying acquisition] ... and have a positive experience."
That may take some time. Canadian SPACs are competing against a hyper-competitive field: mid-sized private equity (PE) companies. PE firms have a leg up on SPACs in any bidding war because they can move faster.
When a SPAC finds an acquisition target, management needs to hold a shareholder vote and hope they approve the deal. That stipulation is akin to a prospective first-time home buyer in a hot market bidding on a house and inserting the home inspection condition. It doesn't guarantee you will lose, but it certainly doesn't help your case. The PE bidder, meanwhile, is heading in with a clean offer.
"We've been working with several SPACs that are in close pursuit of 'deSPACing' [an acquisition]. None have been successful thus far," said BMO's Mr. Miller.
SPACs have existed in the U.S. since the 1990s. It is unclear whether they will have that kind of staying power here.
"Time will tell how big a long-term market exists and whether 2015's initial wave of transactions will spawn more in the future," wrote lawyers Jeremy Fraiberg and Doug Marshall in Osler Hoskin & Harcourt LLP's legal review of the year.