Asia's SPAC race is over; the hard work is just beginning

THE growing number of Asia-focused special purpose acquisition companies (SPACs) is a welcome development for both companies in need of capital and investors looking to deploy it. To really make a difference, the next wave of SPACs will need to prove they can move on from the excesses of 2021.

Singapore can congratulate itself on becoming the first major Asian financial centre to welcome SPACs. Vertex Technology Acquisition Corp, sponsored by Temasek-backed Vertex Ventures, went public last Thursday (Jan 20), swiftly followed on Friday by Pegasus Asia, whose backers include the controlling shareholder of luxury goods giant LVMH. A third, Novo Tellus Alpha Acquisition, filed its prospectus last week and expects to begin trading on Jan 27.

Hong Kong will not be far behind - a SPAC backed by the asset management arm of CMB International on Jan 17 became the first to file for an initial public offering (IPO) under new rules that took effect only at the start of 2022. Bankers and lawyers are already working on many more.

The buzz around these new capital-raising opportunities is justified, but it is important to note that the IPO is only the beginning of the SPAC life cycle.

In 2022, the real story is not where SPACs list - it is how they perform.

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Now that risk assets are under more pressure in a different macro environment, SPACs cannot rely on a rising tide lifting all boats - as recent deals in the sector have shown.

Grab, South-east Asia's leading super app, is one of the few successful SPAC mergers, but has since become a high-profile example of the changing market environment. SPACs and technology stocks were riding high when Grab agreed a record US$40 billion merger with Altimeter Growth Corp in April 2021, but market conditions for growth stocks have become more challenging since it began trading on the Nasdaq on Dec 2.

The number of SPACs going public in the US has tumbled from the 2021 first-quarter peak - 49 completed IPOs in December, compared to 109 in March. The backlog of blank-cheque vehicles that are chasing acquisition targets is already over 400. The institutional investors who typically provide the additional funding needed for the merger - the so-called PIPE funding, or private investment in public equity - are nursing hefty paper losses, leaving them wary of supporting any new combinations.

So it is clear that deals done amid the frenzy of 12 months ago are no longer the right model for future SPACs. Greater market scrutiny will go hand in hand with stricter regulatory oversight, while rising interest rates will also test whether fund managers will continue to park spare cash in SPAC vehicles.

Instead, the next wave of SPACs will need to demonstrate their ability to create real value - no matter where they are listed.

SPAC 2.0

This means investors everywhere will be focusing more on the underlying credentials of the sponsors and the target business, as well as ensuring that incentives for sponsors and shareholders are properly aligned. As a result, we believe investors are likely to seek out SPACs that can show a thorough approach to due diligence and proven expertise in valuing target companies.

The first Singapore SPAC to raise money from the market is evidence of this more rigorous scrutiny. The sponsor is an experienced venture capital investor under the umbrella of state investor Temasek, which is also investing in the IPO as a cornerstone investor. The right next step - a merger with an attractive target company at a reasonable valuation - would create the confidence needed for other SPACs to thrive in the city.

It is also worth remembering that SPACs are not just a tech story. One of the first SPACs from a big Wall Street name, former Apollo founder Michael Gross, bought a container shipping company in 2008. And it was a SPAC that reintroduced Burger King to the public equity markets with a whopper of a deal in 2012.

Indeed, there are signs that SPACs may now be shifting back towards value stocks. In one example, Tim Hortons China, which runs the Canadian coffee chain in China, agreed in August to go public via a Nasdaq-listed SPAC, Silver Crest Acquisition.

A model for Asia

The future for SPACs in Asia is exciting. Stock exchanges here have worked hard to pave the way for innovative companies to go public, but many promising private companies still struggle to make the transition to public ownership - especially in South-east Asia, where the uncertainties of an IPO process and limited local liquidity are big drawbacks.

South-east Asia added 15 unicorns - companies valued at over US$1 billion - in 2021. In total, close to 80 companies in South and South-east Asia have reached that benchmark without selling shares to the public. That is a natural consequence of the abundance of money circulating in the private market, but it can deny ordinary investors, customers and, often, employees of the chance to participate in the growth of dynamic companies.

The enthusiastic response to Singapore's first SPACs underlines the demand for more public market opportunities from Asia's growing investor base. A wider choice of listing options is also good news for Asian companies - as long as the next wave of SPACs can stay focused on performance.

• The writer is CEO of Atlas Growth Acquisition Limited.