2021 might not have brought with it a return to life pre-pandemic, but it has certainly seen the comeback of other interesting trends – drive-in theatres, Paris Hilton and SPACs, a once-popular investment vehicle that fell out of favour because of its association with fraud and penny stock scams.
SPACs – or Special Purpose Acquisition Companies – are today seen as a popular IPO alternative for companies, offering them a quicker and arguably more advantageous route to being publicly listed. While this model is not without its risks, its ability to offer companies access to capital even when market volatility and other conditions limit liquidity has resulted in it experiencing a resurgence in the last few years.
According to S&P Global, in the first half of 2021, 430 SPACs went to IPO, raising a total of $104 billion, exceeding records. At the same time, the fact that many industry heavyweights are tapping into SPACs – Softbank-backed ride-hailing giant Grab recently announced plans to go public via an SPAC merger – will further fuel interest in this model.
The fashion and luxury industry is no exception. In July this year, Ermenegildo Zegna, the luxury group owned by the Zegna Family, said it would list on the NYSE through a reverse merger transaction with Investindustrial, a private equity firm owned by former UBS chief executive Sergio Ermotti. The Ermenegildo Zegna Group consists of its namesake label Ermenegildo Zegna and the American designer brand Thom Browne, which it acquired in 2018.
What exactly is a SPAC and why is this vehicle so sought after today? SPACs – also known as blank check companies – have no real operations other than the preparation of a large sum of money for future acquisition(s). Such companies are required to submit a prospectus that indicates their management team and acquisition intentions, rather than the financial and operational history required for a typical IPO. After the listing is completed, they have 18 months to find a target company and six months to complete the transaction. Otherwise, the company will be liquidated and funds returned to investors.
In Ermenegildo Zegna’s case, Investindustrial “found” the Italian family-owned company six months after listing, and Zegna, as the “acquired” company, was instantly fast tracked to becoming a public company because it did not need to go through the lengthy process of going from private to listed, but simply merged with a listed company. Through this approach, the 12 to 18 months required for a traditional listing vehicle is compressed to less than six months. At the same time, Ermenegildo Zegna – or any other company – that merges with an SPACs are not subject to IPO restrictions, allowing them to advertise shares to investors in the meantime. Ermenegildo Zegna raised $880 million through this move, giving the company an enterprise value of over $3.2 billion and helping it to expand in Asia and the U.S.
The model has also proved popular with companies in nascent market segments that have yet to prove their commercial viability – like commercial space travel, for instance. Richard Branson took his commercial spaceflight company Virgin Galactic public via a SPAC in 2019, back when the idea was seen as nothing more than a pipe dream. Companies merged with a SPAC are allowed to disclose forward-looking financial projections to the public (such content is prohibited in the prospectus of a traditional IPO) and this can boost the confidence of investors interested in such fields. Branson’s successful test flight earlier this year served to bolster confidence in this model, and Virgin Galactic’s share price reached a high of $59.4 in February this year, nearly six times its initial offering price. Virgin Orbit, Branson’s other space company that focuses on transporting satellite payloads to low earth, is now planning to go public in a similar fashion.
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“The main advantage to going public through a SPAC has been definitely true this year, is there’s more certainty of execution. You know earlier on in the process, they will get the deal down,” Alexander Osipovich, reporter at Wall Street Journal opined. “IPOs get derailed at the last minute all the time.” Given the volatility of last year’s market and a lack of clarity about the future, brands such as Cole Haan have pulled their IPO applications.
Beyond an alternative route to an IPO, SPACs can also be viewed as a more regulated form of private equity investment. The most exciting part of this transaction is the journey of finding the target company for the eventual deal, which is why for the market, investing in a SPAC, especially when it has not acquired any companies and has a stable share price of $10, is like unwrapping a blind box – it is hard to say whether a good surprise or a bad shock awaits.
Investing in SPACs at their early stage is more about the company’s management team – mostly prominent executives and investors – and drawing their experience and business combination criteria to determine the value of the company post-acquisition. This adds to the relevance of SPACs to the fashion and luxury industry. Many founders or executives from large conglomerates in the industry have also embarked on an alternative investment path by founding their own SPAC.
Good Commerce Acquisition Company, founded by former GAP Chief Executive Officer Art Peck, filed for a listing in March to raise $200 million and acquire a range of companies in the consumer sector. In its prospectus filed with the US Securities and Exchange Commission, it highlighted three promising territories to follow: apparel & accessories, outdoor and health & wellness, which coincide with Peck’s extensive retail background.
While a SPAC allows these industry veterans to start their own investment business, it also provides an alternative investment window for industry giants in the arena to invest outside of their existing organisational structures. In July this year, Groupe Artemis, the investment group held by the Pinault family, together with Iris Knobloch, former president of WarnerMedia, and French banker Matthieu Pigasse, created a SPAC called I2PO, which was listed in Paris and tends to acquire entertainment and leisure companies with a strong digital touch.
Another French luxury behemoth, Bernard Arnault, also jumped on the bandwagon. L Catterton, the private equity investment arm of LVMH, launched L Catterton Asia Acquisition Corp, which is listed in the United States as a blank check company and will focus on the consumer technology sector in the Asian market. While in Europe, Pegasus Acquisition Company Europe B.V., another SPAC backed by Financière Agache, a holding company controlled by the Arnault family, has chosen to list in Amsterdam and plans to acquire financial services companies in Europe and the United States. In terms of fashion and luxury alone, these investment arms owned by the Arnault family have invested in brands such as Ganni, Birkenstock and Etro in this year alone.
Increasingly, the SPAC model appears to be a vehicle for further capital consolidation in the current market environment. While it is unclear whether or not SPACs will stay in fashion when markets eventually return to normalcy in the coming years, at the very least, they represent a facet of the economy’s current K-shaped recovery. These SPACs have become investment spin-offs to moguls’ main businesses, allowing them expand their portfolios across geographies and industries. Whether these ventures will support the growth of existing business pillars or help them delve into new areas remains to be seen, and only time will tell.