What the SPAC explosion means for Latin America

While NFTs have taken the spotlight as the most popular tech buzzword of 2021, there’s another acronym on the tip of everyone’s tongue. SPACs (special-purpose acquisition companies) — shell corporations that merge with private companies to take them public — have raised more money in the first quarter of this year in the U.S. than in all of 2020. The hype has now overflowed into Latin America, as tech companies from the region become a new target for the 400-odd SPACs searching for new acquisitions.

Fernando Lelo de Larrea, managing partner at ALLVP, a Mexico-based venture capital firm, told Rest of World that SPACs could be one of the last missing links for Latin American venture capital. Currently, in order to turn shareholder value into real capital for investors, regional companies must have successful exits, meaning they either go public or get acquired. “You can’t go any further unless you have liquidity events and you distribute money, and the SPACs will bring that liquidity,” said Lelo de Larrea. 

The hope is that SPACs will create an easier path for these startups to go public in the United States, especially because many Latin American tech companies are already incorporated in Delaware. In turn, successful SPACs featuring Latin American tech companies would provide validation for the ecosystem, proving to investors that the region offers a viable path to realize gains. 

SPACs can also serve as an option for regional tech companies that otherwise likely would not be able to go public. This opens up opportunities for money to flow in because even large retail or hedge fund investors cannot access those types of companies in Latin America directly.

The traditional process of taking a company public — either through an initial public offering (IPO) or direct listing on a stock exchange — is time consuming, expensive, and increasingly competitive for smaller companies, especially as larger ones enter the public markets. As a blank check company, a SPAC can help circumvent much of the regulatory red tape. Sponsors — long-standing industry professionals typically associated with an investment fund — set up a SPAC, attracting other investors through their own IPOs. Once public, the SPAC has 24 months to identify a private company to acquire through a merger known as the de-SPAC. Rather than having to IPO or undergo a direct listing itself, a private company enters the public market through the SPAC.

An early Latin American example of this is the Andina Acquisition Corporation, a SPAC that incorporated in 2011, had an IPO in 2012, and merged with the privately held Colombian glass and aluminum manufacturer Tecnoglass in 2013. Andina changed its name to Tecnoglass Inc. and now trades publicly on the NASDAQ exchange in the United States.

It’s a byzantine process with much ink spilled over the comparative advantages and disadvantages of the maneuver. The upshot, however, is that a company can go public in around six months, compared to the upwards of 15 months of an IPO or direct listing. SPACs are particularly attractive to high-growth, pre-revenue companies, such as tech startups, because they can show future growth projections, which they aren’t able to do through traditional IPOs and direct listings. 

There’s also less risk for investors, who can redeem their shares if they don’t approve of the target company, and it’s particularly lucrative for the sponsors. As a result, many familiar names, from Virgin Group’s Richard Branson to former professional baseball star Alex Rodriguez, have formed their own SPACs, encouraging others to follow in their path.

With increased competition for targets in the United States, ALLVP’s Lelo de Larrea said, “The name of the game is how you differentiate yourself.” As a result, a number of investment firms — including SoftBank, LIV Capital, and Rocket Internet — have formed SPACs with the specific intent of targeting Latin American companies, many specifically targeting the tech sector. This includes DILA Capital, the Mexico-based venture capital firm, which in March became the first Latin American VC fund to announce its own SPAC. 

As the venture landscape in Latin America matures and investment pours in from the United States and Asia, it becomes easier for companies to find funding. Still, successful exits remain elusive for the region’s startups, and without them, there is less cash flowing through the market to fund the next batch of startups. 

Lelo de Larrea said that many tech companies in Latin America will raise huge rounds of funding with the intention of becoming unicorns — billion dollar private companies. Otherwise, “they have a hard time finding an exit,” he told Rest of World. “They’re large enough that it’s not obvious they can do a merger and acquisition with a local player, and they’re small enough that they don’t have access to public markets in the U.S.” 

Although there are notable exceptions to this rule — the U.S. management platform Okta, recently acquired Argentine cloud identity startup Auth0 for $6.5 billion — these kinds of pricey purchases are rarer than the unicorns themselves.

Most also cannot go public through a Latin American stock exchange, such as Mexico’s BMV or Brazil’s B3. In Mexico, there is a lack of retail investors as well as what Lelo de Larrea views as over-regulation. A current provision states that, for a company to go public, it must be profitable, which is a pipe dream for most tech startups. As a result, only a few companies actually IPO in Mexico every year. The more mature exchange in Brazil has witnessed an increase in IPOs, but it’s still not enough to support the country’s rapidly growing tech ecosystem. 

Before SPACs can thrive in Latin America, though, the first experiments need to survive in the United States. The model is already volatile. By their nature, SPACs skirt a good amount of the due diligence that normally goes into the IPO process, which means that they are more likely to fail after merging with a target and taking it public. The company, after all, must continue to perform and drive interest among investors to ensure that its share price doesn’t plummet. “It’s sort of a hack of the system,” Lelo de Larrea said. “You go public without such a high regulatory burden, and then you have to make sure that, down the road, you get yourself ready.”

As a result, many have deemed SPACs a bubble — a near-term shortcut to a risky long-term asset. At the end of March, Bloomberg reported that SPAC listings have slowed down because bankers, lawyers, and auditors can’t keep up with the paperwork. 

While wealthy U.S. investors can stomach the failures of a few SPACs, it could be disastrous for the Latin American tech scene if they involve companies from the region. “If a couple of them don’t succeed, it is easy for investors to just extrapolate [that], No, it hasn’t been good for me to invest in Latin America — I won’t do it anymore,” Lelo de Larrea said.

The onus doesn’t lie only on investors’ willingness, though. SPAC sponsors have to convince Latin American tech companies to merge. Rodrigo Sánchez-Ríos is the co-founder and president of La Haus, a Colombian property tech company that recently raised a $35 million series B. He used to work in finance and is skeptical of the hype around SPACs in the United States. Still, for Latin America, he thinks they’re much needed. “The more capital the better, in any form that you can take,” he told Rest of World. “As a founder, it’s an interesting place to be because you have options, whereas, before, you really didn’t, and you were at the mercy of whatever you could find.”

Other entrepreneurs who spoke to Rest of World offered a perspective that could well serve as a bucket of cold water over the hype surrounding SPACs. Nuvemshop, a Brazilian analogue to Shopify, would be the type of ideal late-stage candidate, having recently raised a $90 million series D round. Rest of World reached out to the company’s CFO, Tatiana Rezende, and her response was simple: “I haven’t spent much time thinking about this.”