Why special purpose acquisition companies haven’t taken off yet

But before we explore how far we have come since the regulations came into effect, let’s briefly unpack what Spacs actually are.

These are companies that don’t have any business operating history. They then raise money from investors through the capital markets with the main goal of buying or merging with an existing business, which eventually becomes listed on the stock market through that process.

The typical Spac process, as also outlined under the regulations, begins with the incorporation of a company under the Laws of Kenya. This company must not engage in any commercial operations prior to applying for listing on the securities exchange.

The Spac then raises capital through an initial public offering (IPO), with at least 90 percent of the proceeds being held in escrow.

These funds may only be used for a qualifying business combination, the liquidation of the Spac, or as otherwise directed by the Capital Markets Authority.

The remaining 10 percent of the proceeds are intended to cover the administrative expenses involved with the IPO, identifying and completing a business combination and general working capital.

Within 24 months, the Spac is required to identify and merge with a target business that has sufficient size and operational scale to justify the combination.

So, where do things stand with Spacs? As at the time of this publication, no Spac transaction had been executed on the Nairobi Securities Exchange (NSE).

This may be due to several factors including one, that the POLD regulations are still relatively new, the NSE has not seen regular IPO activity that could serve as a barometer for Spac success, and also, there has been a global decline in Spac activity across major financial markets.

Notably, there was significant sensation in other markets around Spacs in 2021 and 2022, which coincided with the period when the POLD regulations were likely being developed in Kenya.

However, by 2023, the Spac trend began to wane, particularly in markets like the US, due to reasons such as the underperformance of Spac-listed companies.

It is possible that this global cooling of interest may have dampened momentum in Kenya as well, with potential promoters becoming less motivated to pursue such transactions.

Additionally, skeptics argue Spacs may be too complex for the current state of the Kenyan market, particularly in terms of market readiness and perhaps even regulatory maturity.

There is, however, a real opportunity for these mechanisms to take root in Kenya. After all, Kenya is considered one of the leading private equity (PE) and venture capital destinations in Africa.

However, there remains a critical gap in the business lifecycle in Kenya and that is that the capital markets are not yet playing a strong enough role in supporting private capital.

PE funds in particular face limited exit options through the public markets and are relying on secondary buyouts by other funds to realise their investments.

However, such strategies are not infinitely scalable, and Spacs could provide an alternative pathway by offering PE-backed companies access to additional capital while also creating viable exit opportunities for the funds that support them.

While Spacs may have originated in the US, this tool could be pivotal in revitalising and energising African capital markets. Kenya, is already well-positioned, having put in place a legal framework to support Spac activity under the POLD Regulations.

The key, however, lies in using this mechanism wisely by targeting businesses with real readiness for the capital markets and meaningful scaling potential.

This includes small and medium-sized enterprises (SMEs), especially since the POLD Regulations allow Spacs to list on the SME Segment, a welcome feature aimed at improving capital markets access for high-growth SMEs.

The writer is a Corporate and Finance Lawyer with G&A Advocates LLP.