SPACs entry opens exciting chapter for Singapore market, but do your homework before investing

THE Singapore Exchange (SGX) has unveiled its framework for special purpose acquisition companies (SPACs) with easier rules compared to its consultation in March.

Based on the early response from market participants who spoke to The Business Times, most are in favour of the approach taken.

Many called the bourse's approach "balanced", citing SGX's attention to market feedback and praising the framework as attractive to sponsors while retaining elements of investor protection.

It is understandable why many are cheering the new rules. A calibrated approach is necessary if the framework is to stand a chance of bringing listings to the local market, something Singapore needs.

Necessary move

As it stands, the local initial public offering (IPO) scene over the past few years has been unexciting.

Regional stock exchanges such as Thailand and Indonesia have also outperformed SGX by both the number of listings and capital raised for the year to date.

There are various reasons for this, including the size of our Asean neighbours and their current stages of development.

But it is also clear that many of Singapore's tech unicorns are choosing to go abroad for their public debuts. Valuations and liquidity have been cited as reasons.

SGX remains an attractive place for the listing of real estate investment trusts (Reits), but there is also a need for it to attract the new economy tech players that are now a big part of our everyday lives.

The sheer size of many of these players has made their absence glaring.

New York-listed Sea, which operates e-commerce platform Shopee, has a market capitalisation exceeding all three local banks combined. Grab's upcoming SPAC merger in the US values it at US$39.6 billion, larger than most locally-listed counters.

Whether one agrees with these outsized valuations of tech companies is another topic, but it is clear that their absence is something that needs to be addressed.

SPACs have certain features - such as greater certainty on valuation, as well as a shorter time frame needed to go public - that are attractive to tech companies. The new framework could therefore boost the local capital markets ecosystem.

At the same time, it is paramount for retail investors to be aware of what they are getting into.

Risk and discipline

Between IPO and de-SPAC - the point at which the SPAC acquires a business - IPO investors have some protection.

Most of the IPO proceeds are held in escrow, and investors can redeem their shares if they dislike a deal.

But greater caution is needed after the SPAC merges with a business. In particular, investors should pay attention to the valuation of the target companies and any potential dilution at the point of de-SPAC or further down the road.

SPAC units typically consist of a share and a warrant.

Even if investors redeem their shares, they can continue to hold on to their warrants.

In one sense, this flexibility is good. Investors can redeem their shares and take back their money. But if the SPAC does well later, investors can choose to convert their warrants for shares.

On the flip side, allowing investors who redeemed their shares to also convert their warrants would dilute shareholders who chose to hold on to their shares.

SGX had initially considered limiting redemptions to dissenting shareholders only and making warrants undetachable, but it chose to scrap this proposal following market feedback.

The exchange has introduced a cap on warrant dilution, but investors should be aware of the risks they face.

There is also potential dilution from the sponsor's promote - shares that are obtained for a nominal sum as compensation for sourcing deals.

Under SGX's framework, sponsors of the SPAC are required to have a minimum equity participation. They face a moratorium on their securities for some time after de-SPAC. And there is a limit on the sponsor's promote.

These measures can help with alignment of interest, but investors should be aware that the promote means sponsors could make money on a SPAC even if other investors don't.

These considerations should come on top of an evaluation of the growth prospects and opportunities that sponsors tell them about.

When the first Singapore SPACs come to market, investors should use their wallets to back only the strongest sponsors.

Studying a sponsor's relevant experience and track record is important, but past performance is no guarantee of future results. Investors should ideally look for sponsors who are willing to go beyond the minimum requirements to put more skin in the game and structure their SPACs such that payment comes after performance is delivered - rather than before any performance is seen.

There are SPACs in the United States whose sponsors have proposed mechanisms to demonstrate greater alignment of interest over the long term, and investors can consider some of these best practices when the first SPACs go public.

The arrival of Singapore SPACs opens a potentially exciting chapter for the local market, but it does not mean that everyone should rush in to be a part of the action.