Singapore-headquartered Grab announced earlier this month that it would go public in the United States by merging with a special purpose acquisition company (SPAC). With a near US$40 billion (about S$53 billion) valuation, this marks the biggest of such deals.
For many, this listing structure may sound foreign but Grab is getting in on one of Wall Street’s hottest trends.
Apart from Grab, WeWork has also confirmed that it is going public via a merger with a SPAC. The deal will value the co-working firm, which attempted an initial public offering (IPO) in 2019 but failed, at US$9 billion.
Others that are reportedly eyeing a listing in the US via such a move include Singapore’s online real estate firm PropertyGuru and mixed martial arts firm One Championship, as well as Indonesian online travel booking platform Traveloka.
Amid the boom, Asian bourses from Tokyo to Hong Kong are looking at getting a slice of the pie.
Last month, the Singapore Exchange (SGX) proposed a regulatory framework for SPACs to list on its mainboard and is seeking market feedback until Apr 28.
So, what exactly is a SPAC? Is this the next big thing in Asia?
WHAT IS A SPAC?
A SPAC is essentially a shell entity created by investors to raise money through an IPO.
It has “no underlying operating business” or own other assets apart from “cash and limited investments, including the proceeds from the IPO”, according to an investor bulletin put out by the US Securities and Exchange Commission (SEC) in December last year.
A SPAC’s sole purpose is to acquire or merge with a target company, usually a private one, within a set timeframe in a process termed as de-SPAC.
The investors behind the SPAC, referred to as sponsors, are typically experts in management and deal advisory, although in recent months have included the likes of celebrities like former basketball star Shaquille O’Neal.
“Sponsors are experienced in the industry and … their role is to identify a target company and execute the merger or de-SPAC,” said Mr Stephen Bates, a partner and head of transaction services at KPMG’s deal advisory business in Singapore.
For instance, Altimeter Growth Corp (AGC) – the Nasdaq-listed SPAC that Grab will be merging with – is backed by Altimeter Capital, a technology-focused investment firm based in Silicon Valley. On its website, AGC is described as being “formed to invest in and help bring a world-class technology company to the public markets”.
Typically, investors who buy in at the SPAC’s IPO do not know what the eventual acquisition entails – which is why SPACs are also known as a “blank cheque” firm – but they have the right to accept or reject the deal.
“If investors reject the target, they will receive their invested funds back,” said Mr Bates.
Globally, SPACs have raised nearly US$100 billion from IPOs in the first quarter of this year, already surpassing all of 2020, according to financial data provider Refinitiv. SPAC mergers – when a SPAC uses IPO funds to merge with a target – amounted to US$210 billion. A large chunk of this deal-making takes place on the US exchanges.
WHY IS IT SO POPULAR?
Once an obscure backwater of the capital markets, SPACs exploded in popularity last year for a variety of reasons.
These include investors seeking better investments in a low interest rate environment, as well as pandemic-fuelled stimulus flooding into global economies, said Mr Tham Tuck Seng, capital markets leader at PwC Singapore.
SPACs, with its price certainty, are also being seen as “more attractive” than conventional IPOs amid extreme market volatility, he added.
In a SPAC merger, the target company is able to negotiate its own fixed valuation with the sponsors, compared with the market-based valuation that accompanies a traditional IPO process.
Speed to market is another advantage, although Mr Tham said this will only be the case if the private companies are nearly “IPO-ready” with stable financial controls and a proper governance structure.
Other advantages for target companies taking the SPAC route include garnering quality investors and sponsors who may be able to help grow their business, said Mr Bates.
ARE THERE SIGNS OF RISKS?
Yes, especially when the frenzy has attracted backers from beyond finance, said Associate Professor Mak Yuen Teen from the National University of Singapore’s (NUS) business school.
“The sponsors specifically set up the SPAC for this purpose (of looking for businesses to invest in) and hopefully have greater expertise in finding good targets,” said the accounting professor, who added that SPACs are not new and “have been around for a long time”.
“But when we have all sorts of celebrities or one-hit wonders setting up SPACs, that points to a bubble.”
On this, the SEC issued an investor alert last month, which said “celebrity involvement in a SPAC does not mean that the investment in a particular SPAC or SPACs generally is appropriate for all investors”.
Meanwhile, sponsors are rushing to get their deals done in an increasingly crowded space. This raises the concern of whether some might settle for less-quality acquisitions.
“Because there are so many SPACs chasing after targets, there’s a risk that the quality of some of these targets may not be of certain standards,” said Mr Tham.
Observers also have doubts about how long this blistering deal-making can go on, given the possibility of market saturation and a recent accounting guidance from the SEC.
Last week, the US securities regulator issued an accounting guidance, which called into question whether warrants issued by hundreds of SPACs should be considered as liabilities, instead of equity instruments.
The guidance suggests that many SPACs may potentially have to refile their financial statements to account for the warrants as a liability, according to a Reuters report.
This could be a huge blow to the booming market as it means that deals in the pipeline will have to go back and recalculate their financials, said Mr Tham
ASIA WANTS IN ON SPACS BOOM – GOOD MOVE?
Some Asian bourses are considering rule changes to allow the listing of SPACs, although the response has been tepid in Europe.
A government panel in Japan said last month that SPAC listings should be considered to boost growth, while the Indonesia Stock Exchange is reportedly looking at passing SPAC-related regulations by July.
Hong Kong is looking to have a SPAC listing framework ready by June for public feedback before allowing deals by the end of this year, said a Bloomberg report citing people familiar with the matter.
Meanwhile, the SGX is in the midst of seeking market feedback on its proposed regulatory framework, after which it could introduce regulations by mid-year.
As part of its consultation paper, it said it first considered introducing the listing of SPACs in 2010 but “determined that it was not an opportune time” following feedback.
“Given market developments in United States SPACs listings in recent years and potential merger and acquisition opportunities in the Asia Pacific region, SGX received renewed and increasing market interests to introduce SPACs in the Singapore capital market,” it said.
“In particular under current economic environment, SGX is of the view that the introduction of SPACs may generate benefits to capital market participants and become a viable alternative to traditional IPOs for fund raising in Singapore and the region.”
Mr Tham said given a small domestic market, the local bourse has to be “progressive” in exploring various options, including SPACs, so as to keep up with competition in the region.
While Singapore can bank on existing strengths like being pro-business and having a transparent tax regulatory environment, it should also “aim to be the first one to allow SPACs to list” so as to garner a first-mover advantage, he added.
But there is a risk that the SGX may end up attracting smaller or “poorer quality” listings, according to Assoc Prof Mak.
“Generally, valuations and liquidity are the primary considerations. The markets that a company operates in and is targeting will also be relevant,” he said.
“So SGX may still be attractive to some companies that operate mostly in the region, but are too small to consider listing in say the US.”
Overall for the region, some industry observers have said that the region may not attract the same kind of frenzy as the US, given the low valuations in some markets and the need to include strong investor protection safeguards.
WHAT IS SGX PROPOSING?
The SGX said recent developments have thrown up certain risks about SPACs, in particular excessive dilution for investors and the rush to de-SPAC.
It hopes to address these with its proposed framework, and create a “balanced regime” that safeguards investors’ interests and meet the capital raising needs of the market.
For instance, it proposed that Singapore SPACs have a minimum market capitalisation of S$300 million (US$223 million). This is higher than requirements in the US, such as Nasdaq’s US$75 million market cap.
Having a higher market cap will ensure a SPAC is “backed by experienced and quality sponsors and/or management team with proven track record and repute”, SGX said, adding it would also facilitate “consummation of a quality and sizeable business combination”.
Other measures include a minimum equity participation by founding shareholders and allowing SPAC mergers to be completed within three years instead of the typical two years seen in the US.
It has also asked for a financial adviser, who is an accredited issue manager, to be appointed to advise on the de-SPAC, as well as an independent valuer to value the target company.
A tighter rulebook is understandable, but a balance will have to be struck, analysts said.
“We can be more stringent than the US but … we cannot be overly stringent with too many checks and balances, which will push investors away from listing here,” said Mr Tham.
For Assoc Prof Mak, having safeguards may help to mitigate concerns about SPACs but they also reduce their attractiveness. Singapore also lags behind in terms of investor protection, he added.
One proposal that needs careful consideration is the higher market cap requirement, said Mr Bates.
“Despite the lower market capitalisation rate in the US, this has not detracted the ability of a SPAC to raise a higher market capitalisation amount, or to seek additional funding for the right transaction. Hence, if the market capitalisation amount is lower, this can open SPACs to a broader set of potential target companies and business combinations,” he said.
WHAT SHOULD INVESTORS DO?
As with all investments, investors must do their homework and weigh the pros and cons.
SPACs have “various risks and rewards”, said Mr Bates, with the latter including the opportunity for retail investors to invest in companies that “are traditionally more difficult to get into until the tail end of the transaction”.
On the flip side, investors will have to stomach the risks of finding quality targets and having their money tied up in the SPAC during the set timeframe, he added.
Assoc Prof Mak said investors should consider these aspects – the track record of the sponsors, the quality of those involved in due diligence such as the financial adviser, the target company’s business model and whether it has a path to profitability, the competencies of the company’s management and board, as well as the company’s corporate governance structure.
“From the investors’ standpoint, the idea is that they can invest in early-stage ventures and have more potential upside but it always goes back to risk and rewards – higher rewards or returns come with higher risk,” he said.
“The investors have no idea whether the SPAC will end up merging with a gem or a lemon. They can exit of course but then, there are high fees involved.”