What are SPACs?

If you’ve only got a minute:

• SPACs are gaining popularity as a way for private companies to list on public markets more quickly
• SPACs are backed by sponsors that range from investment firms to prominent individual investors
• Like other investment instruments, there are pros and cons to investing through SPACs

In mid-April 2021, South-east Asian tech unicorn Grab stole the headlines when it signalled its intention to go public. The ride-hailing and food delivery giant’s decision to list in the US may not come as a surprise but Grab did not choose to do it in the tradition manner - filing for an initial public offering (IPO) application.

Instead, Grab decided to go public through a merger with Altimeter Growth Corp, a special purpose acquisition company (SPAC) of tech-focused investment firm Altimeter Capital Management, eventually listing in November 2021.

The route taken by Grab is becoming an increasingly common way for companies to go public, especially in the US markets.

A banner year

2021 was a record year for SPACs. According to SPAC Research, a total of US$162 billion was raised through SPACs, exceeding 2020’s then record-breaking total of US$83.4 billion.

SPAC fever hit its peak in the first quarter of 2021, where over 100 deals were closed, raising just under US$100 billion but has since cooled off on concerns that there might be regulatory roadblocks in the US. These worries have seen the number of SPAC deals in the US dwindle for the remaining of 2021.

That said, SPACs have caught the attention of market regulators outside the US, in particular Asia. South Korea has already listed SPACs for some time while Hong Kong has listing regimes in place.

In March 2021, Singapore Exchange (SGX) announced that it is working on a framework (i.e. listing rules) for the listing of SPACs in the city state as well as seeking market feedback.

The SGX SPAC listing framework was introduced in September 2021, and the first SPAC-listing in Singapore followed less than a year later in January 2022. Within the first month, three SPACs were listed, namely Vertex Technology Acquisition Corp, Pegasus Asia and Novo Tellus Alpha Acquisition.

While SPAC fever has died down in the US, frameworks are already in place in key Asian financial markets and more SPAC-listings should follow in Asia. As such, retail investors should take the time to understand more about such entities and the role they play in public markets.

While SPAC fever has died down in the US, frameworks are already in place in key Asian financial markets and more SPAC-listings should follow in Asia. As such, retail investors should take the time to understand more about such entities and the role they play in public markets.

What are SPACs?

Also known as "blank cheque" companies, SPACs are shell companies. This means SPACs do not have active business/commercial operations or significant assets. Instead, SPACs are established with a mandate to raise funds in order to acquire a private company in future. SPACs are backed by sponsors that range from established investment firms to prominent individual investors.

Similar to the traditional IPO process, a SPAC lists by selling shares and warrants. The latter is a security that allows its holders to purchase more shares of a SPAC later at a pre-determined price.

Because investors who purchase shares and warrants in SPACs do so with little or no knowledge of how their money will be used, SPACs are often referred to as “black cheque” companies. Led by the sponsor of a SPAC, shareholders usually have 2 years to complete a suitable acquisition.

By taking the SPAC route to listing, promising private companies like tech unicorns and even electric vehicle manufacturers are able to bypass the traditional IPO process, shortening the time taken to go public.

The traditional route to a public listing is often time-consuming as companies need to set up investor roadshows, have meetings with institutional investors as well as have financial statements scrutinised by regulators. Overall, this process usually takes 6 to 24 months.

SPACs may have gained a lot of attention in the past couple of years but these entities have been around since the early 1990s and were seen as options for small companies desperately wanting to go public. Interest in SPACs waned in the late 1990s when there was a jump in small-cap companies listing through the traditional IPO process.

Much of why SPACs are moving into mainstream investment circles boils down to increasing demand, private equity players looking to exit their investments and increased regulation making them safer. The Covid-19 induced downturn has also led to companies searching for less traditional means to access capital.

SPAC listing rules in Singapore

According to the SGX SPAC listing framework, any SPAC listing in Singapore must have a minimum market capitalisation of S$150 million.

SPAC listings here will be allowed to have warrants to be detachable and all shareholders would have redemption rights.

Once a merger deal has been struck, the de-SPAC process must take place within 24 months of an IPO with an extension of up to 12 months subject to fulfilment of prescribed conditions.

Sponsors must subscribe to at least 2.5% to 3.5% of the IPO shares or units or warrants depending on the market capitalisation of the SPAC.

The pros and cons of SPACs

As with all types of investments, there are pros and cons for individuals or institutions when investing through a SPAC. So do your due diligence and make an informed decision.

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Sources:

Bloomberg, “Grab’s $34 Billion SPAC Deal Puts Southeast Asia Tech on the Map,” (2021, Apr 12). Retrieved 17 Apr 2021.

CBInsights, “Who Benefits – And Who Doesn’t – From A SPAC,” (2020, Nov 5). Retrieved 17 Apr 2021.

CNA, “Singapore Exchange may allow listing of SPACs but with restrictions,” (2021, Mar 31). Retrieved 14 Apr 2021.

CNBC, “SPACs break 2020 record in just 3 months, but the red-hot industry faces challenges ahead,” (2021, Mar 19). Retrieved 17 Apr 2021.

Nikkei Asia, “Singapore Exchange to prepare for $222m SPAC listings,” (2021, Mar 31). Retrieved 17 Apr 2021.

Russell Investments, “Watching the equity SPAC-tacle,” (2020, Sep 24). Retrieved 14 Apr 2021.

The Business Times, “Singapore bets on niche SPAC listings to capture tech boom,” (2022, Feb 7), Retrieved 10 Feb 2022.

The Business Times, “Things to know before diving into Singapore SPACs,,” (2022, Jan 14), Retrieved 10 Feb 2022.

Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.

All investments come with risks and you can lose money on your investment. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single product issuer.

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