In early April, ride-sharing giant Grab announced that it will go public in the US through the merger of a Special Purpose Acquisition Company (SPAC) with Altimeter Growth Corp. with a close valuation. to US $ 40 billion.
This will be SPAC’s largest deal and also the largest US equity offering by a Southeast Asian company.
Last month, it was reported that Singapore-based market Carousell is considering listing in the US through a merger with a blank checking company, according to people with knowledge of the matter.
The startup is reportedly working with an advisor on the potential transaction that could value the company at up to $ 1.5 billion.
Others who are reportedly considering a listing in the US through such a move include Singapore’s online real estate firm. PropertyGuru and mixed martial arts firm A championship.
More recently, Temasek’s Vertex Holdings also plans to raise funds for trading list a SPAC in Singapore, which could be the first agreement of its kind in the country.
According to sources, Vertex is currently working with advisers on the possible initial public offering (IPO) through SPAC. However, details of the blank check company, including its size and timeline, have yet to be finalized as it awaits listing guidelines from the Singapore Stock Exchange.
The SPAC boom in Singapore is obvious, but what exactly is it and why is it suddenly gaining so much popularity?
What is a SPAC?
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A special purpose acquisition company (SPAC) is essentially a shell company created by investors for the sole purpose of raising money through an initial public offering to eventually acquire another company.
They do not have actual business operations, but are created solely to raise capital to acquire an existing private company so that it can circumvent the traditional IPO process.
Such a business structure allows investors to contribute money to a fund, which is then used to acquire one or more unspecified companies to be identified after the IPO. Therefore, this type of shell company structure is often referred to as a “blank check company.”
When the SPAC raises the required funds through an initial public offering, the money is held in trust until a predetermined period elapses or the desired acquisition is made.
In the event that the planned acquisition does not take place or the legal procedures are still pending, the SPAC is obliged to return the funds to the investors, after deducting the bank and broker commissions.
Because SPACs have no previous operations or financial data to access, their track record depends on the reputation of management teams.
Typically, a SPAC is created or sponsored by a team of institutional investors and Wall Street professionals from the world of private equity or hedge funds.
Investors who buy into SPAC’s IPO generally do not know what the eventual acquisition entails, but they have the right to accept or reject the deal.
SPAC sponsors typically get a 20 percent stake in the ultimate merged company.
However, SPAC sponsors also have a deadline by which they must find a suitable deal, usually within two years of the IPO. Otherwise, the SPAC is liquidated and investors get their money back with interest.
Why are SPACs suddenly so popular?
According to Refinitiv, there were 165 global SPAC IPOs from January to October 2020, nearly double the number of global SPAC IPOs issued in 2019 and five times that of 2015.
Not only is the number of SPACs increasing, but each SPAC is raising more capital through IPOs to enable them to buy larger private companies. SPAC’s average IPO in 2020 was $ 336 million compared to $ 230 million in 2019.
SPACs have been around for decades and often existed as a last resort for small businesses that would have otherwise struggled to raise money on the open market.
However, they have recently become more prevalent due to extreme market volatility caused, in part, by the global pandemic.
Many companies chose to postpone their IPOs (fearing that market volatility could ruin the public debut of their shares), while some chose the alternative route to an IPO by merging with a SPAC.
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A SPAC merger allows a company to go public and obtain an inflow of capital more quickly than it would with a conventional IPO, since a SPAC acquisition can be closed in just a few months instead of registering an IPO in the SEC, which can take up to three years.
Additionally, in a SPAC merger, the target company can negotiate its own fixed valuation with SPAC sponsors.
SPAC’s acquisitions are also attractive to private companies because their founders and other major shareholders can sell a larger percentage of their property in a reverse merger than they would in an initial public offering.
Other benefits for target companies that take the SPAC route include obtaining quality investors and sponsors who can help grow their business.
There are also risks to consider
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Target companies run the risk that their acquisition will be rejected by SPAC shareholders, and investors are literally going blindly into the investment.
Meanwhile, backers are rushing to close their deals in an increasingly crowded space. This raises concerns about whether some could settle for lower-quality acquisitions.
While the SPAC merger process requires transparency with respect to the target company, the due diligence of the SPAC process is not as rigorous as a traditional IPO.
SPAC backers, most of whom are tasked with finding a viable acquisition within two years and not necessarily the best possible deal, are not incentivized to prevent SPAC from overpaying for the target company.
While some high-profile SPACs have performed reasonably well, the advisory firm Renaissance capital found that the average returns from SPAC mergers completed between 2015 and 2020 fell short of the average post-market return for investors in an IPO.
SGX could introduce SPAC regulations
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In early March, the Singapore Stock Exchange (SGX) proposed a regulatory framework for SPACs to include it on your motherboard and seek market feedback, after which you could introduce regulations for this year.
As part of its consultation paper, it said it first considered introducing the SPAC list in 2010, but “determined it was not an opportune time” after feedback.
The SGX said that recent developments have created certain risks on SPACs, in particular excessive dilution for investors and the rush to phase out the SPAC.
He hopes to address them within the proposed framework and create a “balanced regime” that protects investors’ interests and meets the capital-raising needs of the market.
For example, he proposed that Singapore SPACs have a minimum market capitalization of S $ 300 million (US $ 223 million). This is higher than the requirements in the US, such as Nasdaq’s US $ 75 million market cap.
Having a higher market capitalization will ensure that a SPAC is “backed by experienced and quality backers and / or management team with a proven track record and reputation,” SGX said, adding that it would also facilitate “the consummation of a business combination of quality and considerable ”.
Other measures include minimal equity participation by founding shareholders and allowing SPAC mergers to be completed in three years rather than the typical two years seen in the US.
He has also requested the appointment of a financial advisor, who is an accredited issuance manager, to advise on the de-SPAC, as well as an independent appraiser to value the target company.
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