First SPACs take steps to go beyond SGX's minimum requirements

TWO special purpose acquisition companies (SPACs) lodged their preliminary prospectuses to the Monetary Authority of Singapore in quick succession last Thursday (Jan 6), setting the stage for the first blank cheque companies to list on the Singapore Exchange (SGX).

The prospectuses give investors an idea of what we could expect from Singapore SPACs, following the rollout of the framework for such vehicles last September, and the initial verdict is likely to be positive.

Brand names

First, the sponsors of the 2 SPACs are made up of well-known names.

Vertex Venture Holdings - the sponsor for Vertex Technology Acquisition Corp (VTAC) - is a venture capital platform linked to Singapore state investor Temasek. Vertex has investments in over 200 portfolio companies and over US$5.1 billion in assets under management (AUM), including US$3.7 billion in AUM managed by 18 global network funds that are managed by independent general partners.

The sponsor group for Pegasus Asia includes Tikehau Capital, which is an established European asset manager with some 30.9 billion euros (S$47.6 billion) in AUM as at end-June 2021.

Tikehau is partnering Financiere Agache - LVMH CEO Bernard Arnault's family office - for the SGX SPAC. This is the third partnership for the group in SPACs, having launched 2 in Europe last year.

These established names set baseline expectations that future sponsors would need to live up to.

Beyond their track record, both sponsors have also included provisions to demonstrate alignment of interest. Some of these exceed the minimum requirements set out by SGX.

Sponsor commitment

SGX SPAC sponsors are required to have a minimum equity participation - to have "skin in the game" and better align interest with shareholders. The prescribed threshold is 3.5 per cent for SGX SPACs with a market capitalisation between S$150 million and S$300 million.

Vertex Venture, through a wholly-owned subsidiary, is subscribing to 6 million units for S$30 million, making up 15 per cent of VTAC's S$200 million market capitalisation post-offering.

Another Temasek-related entity, Venezio Investments, is among the 13 cornerstone investors for VTAC, and the 6 million units it is subscribing to are also subject to certain lock-up provisions.

Meanwhile, the sponsor group for Pegasus Asia has committed to subscribe to 4.4 million units for S$22 million - accounting for nearly 15 per cent of the market capitalisation of S$150 million.

Both sponsors have also made additional commitments to the SPACs' "at-risk capital", which is used for offering costs and operating expenses, and is not part of the proceeds held in escrow.

In VTAC's case, the sponsor is subscribing for up to S$10 million in private placement warrants as part of the at-risk capital contribution. The sponsor group for Pegasus is subscribing to founders' shares and warrants of up to S$8.1 million.

Safeguarding of funds

Under SGX listing rules, SPACs are required to deposit at least 90 per cent of their proceeds in escrow to safeguard the invested funds of independent shareholders pending an acquisition.

But both VTAC and Pegasus have said they will deposit 100 per cent of the IPO proceeds into their escrow accounts. This is similar to market practice in the United States, where some SPAC sponsors have even overfunded trusts to attract investors.

Investors get back a pro-rata share of the escrow account if they choose to redeem their shares at the point of a business combination, or if the SPAC fails to find a target and liquidates.

Promote dilution

SPAC sponsors are usually compensated with shares obtained for a nominal sum. This is known as the promote.

SGX has capped the promote to 20 per cent of the SPAC's IPO issued capital, in line with US market practice. The promote is dilutive to investors, and both VTAC and Pegasus Asia have highlighted the potential dilution in their respective prospectuses.

But both sponsors also included conditions such that their benefits from the promote would be staggered.

Vertex has incorporated a time-based and price-based vesting structure for its promote shares, with allotment at various milestones.

The first tranche, 49 per cent of the promote, will be vested and allotted 12 months after the completion of the business combination. The remaining 51 per cent will be equally split in 3 tranches, only vesting after the SPAC has crossed the returns thresholds of 20 per cent, 40 per cent and 60 per cent.

Tikehau's founder shares - which are not listed or traded on the SGX - are also subject to a promote schedule for conversion into shares that are listed and traded on the SGX.

Half the founder shares are converted into shares on a one-for-one basis upon the completion of a business combination. The remaining founder shares will be converted to shares if the closing price post-business combination exceeds the price thresholds of S$5.75 and S$6.50, or 15 per cent and 30 per cent over the IPO price.

Other noteworthy features

Vertex has structured its units such that IPO investors will also get 0.3 of a warrant, with an additional right to 0.2 of a warrant per share.

The additional warrants will only be issued later to shareholders who did not redeem their shares at the point of business combination.

This is likely to give investors added incentive to hold through the de-SPAC.

Investors who redeem their capital at business combination would only hold 0.3 of a warrant, making any arbitrage opportunity less lucrative.

Genuine investors who hold through de-SPAC would have added upside potential from the 0.2 warrant, minimising the potential dilution from free riders who have already cashed out.

The Pegasus SPAC also comes with some unique features. Its sponsors have provided an unconditional and irrevocable commitment to further invest S$40 million in units at the point of business combination, via a forward purchase agreement, with Tikehau Capital and Financiere Agache contributing S$20 million each.

Pegasus has also managed to put together a respectable board of directors. Its independent chairman is Eleanor Seet, president and head of Asia ex-Japan at Nikko Asset Management Asia.

Its independent directors include the chairperson of the Singapore Institute of Directors, Wong Su-Yen, as well as chief executive of EDB Investments Chu Swee Yeok.