(Bloomberg) -- As a British company known for its tie-up with the National Health Service, Babylon appeared destined to float on the London Stock Exchange. Instead, its founder Ali Parsa chose to cash in on a boom in the US that saw companies go public by reversing into listed cash vehicles, known as special purpose acquisition companies or “SPACs.”

Less than two years after its blockbuster listing valued the startup at $4.2 billion, Babylon is on the brink. The company has run out of cash and the New York Stock Exchange delisted it in June, wiping out shareholders. Having shuttered its US business, Babylon, which promised to transform global health care with an app using artificial intelligence, is now racing to secure the future of its UK arm.

Parsa is among a number of British entrepreneurs who chased lofty valuations in New York at the height of the SPAC craze in 2021, only to come undone when the market deteriorated. 

SPACs are publicly traded corporate shell companies which target mergers with other businesses, which then take on the shell’s listing. Investors who buy into SPACs decide whether to keep their shares or get their money back once a target company is found.

Like Babylon, three other UK companies that listed via SPACs in New York between 2019 and 2022 – connected car company Wejo Group Ltd., music streaming service Akazoo Ltd., and semiconductor company Rockley Photonics Holdings Ltd. – have also delisted after running into problems. 

The other nine that reversed into SPACs in that period – including online second-hand car retailer Cazoo Group Ltd., payments company Paysafe Ltd., and electric vehicle maker Arrival SA – have lost 88% of their value on average.

Analysis by Bloomberg and the London Stock Exchange Group Plc reveals that an investor who put money in each SPAC would have lost 90% of their total investment. A combined $29.5 billion of value has been wiped off those UK companies, which were mostly tech startups.

That compares with a 42% decline for the IPOX SPAC Index, which is a collection of the top publicly traded SPACs and those which completed deals.

City minister Andrew Griffith said rushing to list in the US did not guarantee more success than going public in London.

“Far from the grass being greener, I encourage firms looking to reach a global audience to look no further than London,” Griffith said.

Bursting bubble

Babylon’s problems began before it joined the stock market. In the US, investors buy into SPACs prior to them finding an acquisition target. Then, once a target company has been chosen, the shareholders of those SPACs get an opportunity to redeem their shares if they do not like the chosen target — in this case Babylon.

Like many other companies, the vehicle Babylon merged with suffered high redemption rates.

Parsa said in an interview last year with the online tech publication Sifted that the redemptions were “massive”. It left Babylon with a deficit of hundreds of millions of dollars. He said taking the company public via a SPAC was “my biggest mistake.”

Charlie Walker, head of equity and fixed income primary markets at the London Stock Exchange Group, said shareholders who put money into SPACs at the height of the boom often looked at them as “financial tools rather than long-term investments.” That meant many companies may have thought they were reversing into a SPAC with a large pool of capital, when in fact there ended up being large redemptions, he said.

“It is therefore important for companies to carry out thorough due diligence to understand the SPAC investors’ objectives,” Walker said.

Despite some of them earning valuations in the billions of dollars, US investors often overlook companies of that size because they are deemed small. “If you look at a lot of these companies, the US was not a logical market for them,” he said.

Dru Danford, head of investment banking at London-based corporate broker Liberum, said UK companies listing in the US “frequently find themselves lost in a much bigger pool where size really does matter.”

Go west

Regardless of the SPAC bubble bursting, UK companies continue to complain about lower valuations in London versus Wall Street. This week, online trading platform Plus500 Ltd. said it would consider a US listing to attain a higher valuation, while pollster YouGov Plc’s chairman Stephan Shakespeare said it was eyeing a move to New York because US investors were “better at supporting companies like ours.”

To counter this, the UK has been undergoing a major shake-up of listing rules to make it a more appealing destination for private companies looking to go public.

The Financial Conduct Authority is carrying out a Primary Markets Effectiveness Review, the biggest rewrite of listing rules since the 1980s. The government has launched its own set of reforms aimed at making UK capital markets more attractive.

Griffith, the City minister, said the reforms would build on the UK’s “leading position by enhancing access to market information, helping hire the best global talent, and making it easier for companies to raise capital.”

For Babylon, former shareholders who lost their entire investment are now licking their wounds.

“An undercapitalized SPAC and a high burn rate did not make a good combination,” said Hussein Kanji, partner at venture capital firm Hoxton Ventures LLP, who also praised Parsa for being “ahead of his time” in predicting the importance of AI to health care.

Another UK SPAC could face a similar destiny. Last week, Sky News reported that Arrival was working with advisers at Alvarez & Marsal Inc. to prepare for a possible insolvency — although the EV company’s shareholders have already lost virtually all of their money.

©2023 Bloomberg L.P.