Wild markets are good for SPACs, bad for IPOs

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It's arguably the most prosaic acronym in Canadian financial services, but the humble SPAC – which stands for special purpose acquisition corporation – has been one of the main propellers of the Canadian initial public offering (IPO) market in 2015.

SPACs have existed in the United States since the 1990s, but only popped up in Canada this year. Typically these blank-cheque, shell companies have two years to make an acquisition. Otherwise they must return their capital to shareholders.

Since Dundee Acquisition Ltd. debuted in April, three more SPACs have followed, raising just under $1-billion in IPOs. A fifth, Gibraltar Growth Corp., is in the works, announcing in July that it was seeking to secure $100-million from investors.

But now one of the vehicles that helped ignite the IPO market in the first half of the year could contribute to its fizzle over the remainder of 2015.

"We have had a whole bunch of companies come to us, that were potentially looking at going public in the fall, where the management team has said, 'We're not sure we want to leave this to the vagaries of the market. Would you guys consider partnering with us?' " said Neil Selfe, CEO of Infor Acquisition Corp., in an interview last week. Infor, a SPAC, went public in May and has been poking around for an acquistion since.

Mr. Selfe made it clear that Infor is looking at a multitude of opportunities, so a buyout of a private company about to go public is only one possibility.

But less than favourable markets in recent weeks have raised the spectre of companies cashing out instead of going public.

"Recent volatility, if it continues, might spook investors," said an investment banking source in an interview.

Even in a relatively calm market, companies about to go public often worry about whether a one-day selloff will result in a blown IPO. But over the past few weeks, mainly because of a shaky Chinese stock market and economy, investors have grappled with higher than normal volatility. When investors expect unsteadiness, the reasons for selling to a strategic buyer may outweigh the risk of an IPO.

While private companies cancelling IPOs in favour of a sale are rare, it isn't unheard of.

In July, weeks before it was due to start trading, Canadian paper shredding and hard drive destruction company Shred-it International Inc. ditched its $600-million IPO and sold itself instead to U.S. competitor Stericycle Inc.

Companies that go this route avoid leaving themselves open to the whims of the public market – and owners have the opportunity to cash out in full, which is often not an option in an IPO.

On a number of occasions in 2015 – Shopify Inc. being an example – formerly private companies have gone public with owners keeping a big, or even a controlling stake (through multiple-voting shares). That isn't likely to be an option in a SPAC buyout. SPACs are typically looking to buy at least 80 per cent of a private company – if not the whole thing. Companies that opt for a sale to a SPAC would have to be comfortable getting out entirely.

One way for the SPAC to get around this problem is to buy a private company that is no longer majority owned by its founders – as was the case with Shred-it, which was owned by Canadian private equity company Birch Hill Equity Partners and U.S. firm Cintas Corp. (Shred-it's founder, Greg Brophy, died in a plane crash in 2007).

If the current uncertain IPO market plays into the hands of SPACs, then it also helps out private equity firms, which are also on the lookout for a deal.

"The choppy IPO market is good for private-equity buyers," said a private equity source. "Having values fall to more rational levels is probably a good thing."