A new avenue for fund raising

SPECIAL Purpose Acquisition Companies (SPACs) have been in the spotlight in recent years, with several high-profile companies attempting to use this vehicle to list on a stock exchange. In April, Singapore-based tech unicorn Grab announced that it planned to list on Nasdaq through a merger with Altimeter Growth, a SPAC, at a valuation of nearly US$40 billion.

Simply put, SPACs are shell corporations listed on a stock exchange with the purpose of acquiring a private company, thus making it public without going through the traditional initial public offering (IPO) process. These entities are sometimes referred to as "blank cheque companies", as SPAC investors will not know ahead of time which private company will be acquired with the funds they have invested.

A SPAC framework is similar to a traditional IPO in many ways. Both enable companies to raise funds and fuel their growth plans, while ensuring that accountability to their investors are met. The main difference is that in an IPO, a company is looking to raise capital; while in a SPAC, capital is seeking a suitable company in a 'de-SPAC' transaction, which refers to the merger of the SPAC and the target private business.

Market watchers say that SPACs offer an additional avenue for companies to tap public equity markets for funds, while enabling investors to seek out alternative investment opportunities that would otherwise only be available in the private equity space.

"The credentials of the sponsors, financial intermediaries and founding investors of the SPAC give the investing public confidence in their ability to spot a high-potential business and accelerate its growth to yield strong returns," said Max Loh, EY Asean IPO leader, Singapore and Brunei managing partner, Ernst & Young LLP.

"A robust executive team can help raise capital faster and at higher amounts. This bodes well for the target company in attracting capital and funding, which is especially pertinent for new economy and high growth businesses."

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Growing interest

The explosive growth of SPAC listings in the US has attracted the attention of the regional stock exchanges in Asia, particularly in Hong Kong and Singapore. Singapore has allowed SPAC listing since 3 Sep 2021, a move that reinforces its position as a major financial hub.

Companies keen on tapping capital markets will find it attractive to raise funds via a SPAC instead of an IPO due to the certainty of the valuation of the transaction. Furthermore, traditional IPOs usually take around 12 to 18 months to be completed, whereas a SPAC merger can be done in 3 to 6 months.

However, the option for companies seeking to go public in Singapore through a SPAC is only available to those that meet the criteria equivalent to list on the main board. Hence, companies who wish to list on the secondary Catalist board are still required to file a traditional IPO.

"While SPACs have generated much interest in recent years, the ability to seek out quality companies to be acquired by a SPAC is critical in sustaining long-term interest," said Joshua Ong, managing partner & practice leader, capital markets & IPO, Baker Tilly.

Looking ahead, the massive liquidity in Asia should generate much interest in SPACs as evidenced by the growing number of Asia-based sponsors backing SPAC listings in the US. In addition, the region has been a fertile breeding ground for acquisition targets, particularly those in high-growth industries; such as technology, biotech, renewable energy and gaming.

"I believe there will much interest from investors keen on SPACs that are able to access promising Asian companies. The success of these high-profile companies going public via SPAC should generate confidence for more companies in the region to follow suit," said Ong.

Impact on Singapore

Already, industry watchers have seen a number of notable SPAC sponsors eyeing listings in Singapore. The interest is being reciprocated regionally by target companies, especially those that are high-growth tech businesses keen to leverage SPACs as an alternative and streamlined route to traditional IPOs.

This interest in Singapore is unsurprising, as the Republic is known as an attractive listing venue for REITs, and enjoys a stable economic environment and government.

The Singapore Exchange (SGX) has also introduced a listing framework for SPACs, while the government recently announced a S$1.5 billion fund to attract tech companies to list on the SGX.

That said, market watchers believe that the long-term growth of the Singapore SPAC market will be driven by successful de-SPAC transactions early on.

"It is important for the initial SGX-listed SPACs to have quality sponsors and attractive targets to ensure that SPACs are viewed positively by targets looking to list, as well as investors," said Benjamin Ong, partner, head of corporate finance, deal advisory at KPMG in Singapore.

"A track record of successful de-SPACs will also encourage more companies to consider an SGX-listing in the short and medium term, both via the traditional IPO market and SPAC routes."

Beware of risks

Investors need to be mindful that while SPACs offer an alternative investment opportunity, there are ensuing risks as well.

"Specifically, investors should recognise that when they invest in a SPAC, they will not yet know the target company they are investing in, unlike in a traditional IPO wherein the company's financial information and business strategy are made available to all investors," said Loh.

A SPAC candidate will also need to consider its ability to operate as a public company and comply with SGX's listing requirements.

"A good starting point would be to conduct an early and holistic assessment of the company's IPO readiness in areas ranging from internal controls, financial reporting obligations, taxation, IT systems, investor relations and corporate governance," advised KPMG's Ong.

Moreover, the SPAC process is not cheap. The sponsor typically takes 20 per cent of the merged entity virtually for free, and the costs are then passed on to the target company. Add on costs of the SPAC and de-SPAC transactions and the total costs could be significant - which the target company has to bear.

Said Loh: "While SPAC may offer a faster route to going public, such transactions can sometimes take longer to consummate and target companies may face challenges in their readiness to operate and report as a public company.

"For a company that has set its sights on an IPO listing, a de-SPAC is a viable option given the greater certainty of valuation and execution, although the costs involved should be duly considered."

Clearer rules needed

With interest picking up in this instrument, experts say clearer rules are needed. As investors are essentially giving the SPAC a blank cheque to go shopping for a company, there are uncertainties and risks which retail investors may not be aware of or appreciate.

"Clear rules and regulations surrounding the SPAC, business combination and disclosure requirements are needed to protect investors' interest. However, the level of regulation has to be a delicate balance in order to maintain the attractiveness of SPACs," said Baker Tilly's Ong.

Loh noted that the SGX SPAC framework sets out clear guidelines to ensure that the interests of sponsors, companies and investors are aligned. In particular, guardrails are in place that focus on the sponsors' quality, track record and "skin in the game".

Are SPACs here to stay?

The sustainability of SPACs is very much dependent on the quality of the companies going public via SPAC, the maturity of the investment community, and an effective regulatory framework, said Baker Tilly's Ong.

"The ability to achieve an equilibrium and alignment of the various stakeholders' interest may be challenging, but it is a good alternative. However, my take is that traditional IPO will remain to be the mainstream for companies seeking to tap the capital markets," he noted.

The Covid-19 pandemic has also accelerated interest in SPACs, as it has made traditional IPOs riskier for companies. Furthermore, fiscal stimulus and lower yields globally have driven capital to chase companies through a SPAC versus an IPO.

Said Loh: "SPACs give companies an alternative capital fund raising route, while affording investors more options and choices which they would otherwise not have. The interest in SPACs will be here to stay - how it remains relevant and sustainable will depend on how the entire ecosystem embraces it and makes it a success."