Why Singapore is right to see potential in SPACs

SINGAPORE'S decision to allow the listing of special purpose acquisition companies (SPACs) is a timely endorsement of a financing tool with huge potential in Asia.

At a time when the format is under the spotlight - with regulators studying the model and at least one high-profile lawsuit in the US - Singapore's move is an undeniable vote of confidence. It reflects the depth of demand for the product in Asia and a conviction among regulators that SPACs have an important role to play in the region's capital markets.

Access to those public capital markets, however, should not to be taken for granted. To secure its future as a legitimate, mainstream financing tool, the SPAC format will need to stand up to a full examination by all market participants.

We believe that the next generation of SPACs will do just that.

After a record run of issuance over the past 12 months, the SPAC sector has become too closely associated with the excesses of the post-Covid tech boom. Quick-fire deals with heady valuations and celebrity backers have led to a perception that SPAC sponsors are focused on short-term opportunism rather than long-term value creation.

If there have been any excesses in the SPAC world, market forces are already at work in correcting the imbalance. With over 400 US-listed SPACs currently searching for an acquisition, the intense competition for targets means some existing vehicles are destined to be dissolved without a successful merger. It has also become far harder to raise money for a new SPAC: listings totalled US$16 billion in the second quarter of 2021, according to S&P Global, down from US$88 billion in the first three months of the year. To entice investors, more SPACs are now overfunded, so that shareholders can elect to redeem their cash plus an extra 1-2 per cent at the point of a merger.

THE CASE FOR SPACS

The underlying rationale for a SPAC, however, hasn't changed.

At its core, a SPAC is a way to bring a private enterprise into the public markets, creating a tradeable market for a company's stock and giving a broad range of investors access to companies that are often innovative and growing fast. For companies looking to go public, SPACs offer an alternative to the traditional IPO, alongside the direct listings that have become increasingly popular in the technology sector. Different routes will suit different companies, but a listed SPAC with a strong management team and money raised from the market in advance can be a compelling IPO alternative.

Some companies will prefer to combine with a listed SPAC because they can retain more control over the valuation and other key terms, rather than take their chances with an IPO, where their valuation will be driven by market conditions at a single point in time.

Indeed, concerns about the IPO process and the US$7 trillion wall of private capital are the main reasons many companies are choosing to remain private for longer today. The main beneficiaries of this trend are institutions that have access to privileged investment opportunities. When these companies merge with a SPAC, though, anyone can invest in them. In this way, SPACs are actually vital to upholding the role of public equity markets in allocating capital to growth companies.

A SPAC also offers investors the chance to participate in the search for an acquisition at an early stage. It can also be an attractive risk-reward proposition for those looking for some downside protection: shareholders who vote against a merger get their money back at the IPO price.

A MORE MATURE MARKET

A lot of the scrutiny now facing SPACs focuses on investor protection and the potential for bad actors to mislead retail investors. We would argue that the same risks exist for any financial investment, and that the level of disclosure required of any company listing in the public markets is already a high bar. More to the point, the US capital markets offer their own powerful incentives: sponsors who leave investors saddled with a bad deal will take a significant reputational hit and find themselves exposed to class action lawsuits.

We believe SPAC sponsors must approach any listing as a long-term commitment, not a guaranteed payday. Singapore's rules support this conclusion: sponsors must buy a minimum portion of any SPAC listing, and their shares will be locked up for at least six months after a merger is completed.

Singapore will take time to establish itself as a viable SPAC market, of course. The city's thin trading volumes by comparison with the US will be a hurdle for potential sponsors, at least initially. But the SPAC concept will continue to thrive because of the enormous opportunity it presents to connect emerging companies with the public markets. As the market matures, investors will focus less on celebrity name recognition and more on the ability of a SPAC's own management team to deliver transactions that create long-term value. The next generation of SPACs deserve to be judged on their own merits.

• The writer is CEO of Atlas Growth Acquisition Ltd