The corner of Bay Street and Adelaide streets in the heart of Toronto’s financial district.Gloria Nieto/The Globe and Mail
They came to Canada only three months ago, but special purpose acquisition companies – or SPACs – are already winning over investors.
These acquisition vehicles tap investors for funds, and then use the proceeds to strike a deal. Because they aren't allowed to have a specific acquisition target in mind while fundraising, SPACs are sometimes called "blank cheque companies." After fundraising, they have two years to complete a purchase.
Initially, SPACs sell two classes of shares – class A shares bought by ordinary investors, which can be converted into class B shares when the company makes an acquisition, and class B shares, which the founders usually buy, and that come with warrants. Forty days after closing the initial financing, the warrants split from these shares and trade on their own.
SPACs themselves are publicly traded, which means getting acquired by one is an easy way of going public for a private firm, or an alternative to another private investment.
Dundee Corp. worked with Canadian regulators for more than a year to get them comfortable with the SPAC structure, and then set out in March to raise $100-million – marking the first SPAC to come to Canada.
Building on this support – and regulatory blessings – Infor Financial Group, a newly founded investment and merchant bank, launched a SPAC of its own in recent weeks, hoping to raise $100-million. The fundraising process has now ended and investor demand exceeded expectations. Infor will now raise $200-million – and still has the option for $30-million more.
The composition of buyers for Infor's deal proves demand isn't coming solely from U.S. hedge funds that are the traditional SPAC supporters south of the border. Roughly 90 per cent of Infor's backers are Canadian firms, such as pension funds and long-only institutional investors, according to someone familiar with the deal.
But much like with search funds, another acquisition vehicle that fundraises in a similar way, finding investors is only half the battle. Both Dundee and Infor must now go out and find worthwhile acquisitions.
Because regulators prevent the SPACs from having any acquisition targets in mind while raising money, it is too early to tell what they could end up buying. But given both Dundee and Infor's roots, something in the financial services world wouldn't be surprising.
TMX Group Ltd., which runs the Toronto Stock Exchange, recently updated their rules to allow SPACs after these vehicles became popular in the U.S. South of the border in 2008, they accounted for about half of all IPOs, and 11 new SPACs were launched in 2014.