Proof of SPACs will be in their buying
There is reason to hope that SPACs will take off successfully here, which will give investors something new to consider
The phrase "blank cheque" conjures up the image of a recipient who is granted carte blanche to do as he wishes, often in a capricious manner that ends badly for all.
So should investors be wary when it comes to investing in a special purpose acquisition company (SPAC), which is also known as "blank cheque" company?
SPAC listings have attracted much interest in the US due to their speed to market and ability to offer price certainty in valuing target companies. Such companies could make their debut in Singapore soon.
Looking at the consultation paper on Proposed Listing Framework for SPACs by the Singapore Exchange (SGX), which was open for comments until April 28, investing in Singapore SPACs may not be all that risky.
A SPAC will raise money at its initial public offering (IPO) without having any operational business. The SPAC then has up to three years to find a business, which needs to meet the mainboard listing requirements of the SGX.
In the meantime, SPACs need to keep at least 90 per cent of IPO proceeds for the purpose of funding the acquisition of a business.
When a SPAC has found the business to be acquired, shareholders will be asked to vote on whether the SPAC should go ahead with the acquisition. Dissenting shareholders can get their monies back, which translates to recouping at least 90 per cent of the sum invested.
Buying into a SPAC looks akin to buying an option. Some money is lost if one does not like the business that a SPAC is buying into. Also money is tied up, generating minimal return for up to three years.
But there may be plenty of upsides if a SPAC lands the right deal.
Founding shareholders and management of a SPAC are to hold minimum equity at IPO of between 1.5 and 3.3 per cent, depending on the SPAC's market capitalisation.
A sponsor may choose to hold more than the stipulated minimum equity in the SPAC and, with skin in the game, is incentivised to secure the right business deal.
Screening for which SPAC to invest in matters. SPACs may offer investment thesis focused on a sector and geography. An investor could invest in a SPAC based on the investment thesis.
Screening would also focus on the quality of founding shareholders and management. The process can be likened to that of hiring a candidate for a job. One would study the credentials and track record of the SPAC creators to form a view on how the SPAC may perform. But there is no guarantee that a SPAC with a well credentialed creator will snare a good deal.
Perhaps it may make sense to invest in a couple of SPACs, as such diversification minimises the risk of investing in the "wrong" SPAC.
Performance hinges on success
The Singapore equities market has in recent times seen numerous good companies leave the bourse upon successful privatisation by major shareholders. Meanwhile, it is with real estate investment trusts (Reits), which debuted on the SGX in 2002, that the bourse has found success.
Will SPACs be like Reits and gain traction with the investment community here?
Reits differ greatly from SPACs. At the time of listing, investors know exactly what properties a Reit owns, and the Reit provides the investor with steady distributions right from the outset.
But a key ingredient behind the success of Reits applies to SPACs.
CapitaLand injected high-quality assets into Singapore's first Reit. Over time, other strong sponsors, such as Mapletree Investments, ARA Asset Management, Keppel Land and Frasers Property also set up Reits with quality assets.
Whether Singapore SPACs are good investments and hence an investment asset class that investors need to seriously consider will hinge on the success or otherwise of the first few SPACs to strike sound deals on good businesses.
SPACs will take off if investors see strong sponsors secure credible deals for SPACs. On the flip side, if SPACs buy lemons, investors will quickly steer clear.
What type of deals would Singapore SPACs snare? As a major financial centre for South-east Asia, it may be natural for Singapore SPACs to aspire to secure exciting South-east Asian listing prospects.
South-east Asia's leading super-app platform Grab will list in Nasdaq via a merger with a SPAC, Altimeter Growth, that values the group at about US$40 billion. Grab may consider a secondary listing in Singapore after its Nasdaq listing.
If Singapore had SPACs, could a locally-listed SPAC have secured Grab? Is this wishful thinking?
Big ambitious groups like Grab may naturally gravitate to the technology-heavy Nasdaq, which is home to global giants such as Apple, Amazon and Facebook.
Should promising businesses in this region get lured away by US SPACs or choose to go public via the IPO route, there is little need to look at investing in Singapore SPACs.
SPACs enhance choice to business owners who are considering listing. This may encourage more businesses to go public rather than be lured away by private funds. By going public, retail investors get a chance to invest in the said businesses.
Be at the front of the queue
Investors in SPACs need to work hard to scrutinise the business a SPAC acquires and the terms and conditions of the deal, just as they would with any business that is coming to market via the IPO route.
They may also need to temper expectations on the returns they can achieve. With Grab for example, larger gains would accrue to early stage investors such as SoftBank.
Much wealth is being managed out of Singapore. Exciting businesses are emerging in South-east Asia. SGX has an established brand and investors can be confident that there will be a sound regulatory regime governing SPACs in Singapore.
If SPACs do end up bringing emerging technology plays to the local market, investor interest in the local bourse will spike as there will then be more growth plays to supplement a market which is oriented towards yield plays such as Reits.
There is reason to hope that SPACs will take off successfully here, which will give investors something new to consider.
Securing good deals, though, may be challenging in an environment where liquidity is abundant. Already in the US, the emergence of a large number of SPACs led Warren Buffett of Berkshire Hathaway to lament at the group's recent annual general meeting that SPACs have made buying whole companies pricey for Berkshire.
Perhaps it will be the fear of missing out that lures investors to put monies in Singapore SPACs. Be at the front of the queue to say yes to a new business coming to market and get to enjoy the upside from the said business trading well post-listing. Avoid having to ballot for the retail tranche of a popular IPO and get a tiny allocation of it, if at all.
READ MORE: Not all SPACs are created equal; not all deals will work out
