Branson gets a US$400m blank cheque

Some have rung the death knell of public equity, but it has been given new life via the listed special purpose acquisition company. This week the Virgin leader Richard Branson’s VG Acquisition Corporation launched a US$400 million blank cheque group which can use shareholder money to purchase target businesses.

Money formerly destined for private investment has likely detoured to Spacs. Branson has a reputation as an intrepid pioneer in areas such as music and space travel. In reality, he needs capital to feed his cash-draining groups such as Virgin Atlantic. Relying again on the popular Spac scheme — he listed Virgin Galactic last year using one — reveals him as opportunist, rather than plucky trailblazer.

Spacs — cash shells — have existed for many years. Up to August, Spac issuance of nearly US$20b in the US exceeded all of that in 2019. Factors that breathe oxygen into these launches include a long-running equity bull run, some hot market theme, such as online technology, and a famed sponsor.

Britain’s Martin Franklin has had success with Spacs, and recently launched plans for a London-listed version. Even he has his doubts about the mania, telling a television interviewer last month “you know this is going to end badly. It always does”.

Good advice. Indeed, research by the Financial Times revealed that most Spacs do not perform well. Of those launched in the four years to 2019, more than half remain below their standard initial IPO price of US$10. One possible reason for Branson’s enthusiasm, and others’ caution, is that this Spac could provide another way to raise money for Virgin companies. The prospectus says VG Acquisition “is not prohibited from pursuing an initial business combination with a company affiliated with our sponsor, officers or directors”. Perhaps this is boilerplate legalese, but it suggests intent.

Cynics will turn up their palms, citing Branson’s business smarts. Most should see VG Acquisition as raw opportunism when the Virgin group is struggling for cash. Financial Times