Grab, Carousell, Temasek’s Vertex path to IPO: What is a SPAC?

Earlier in April, ride-sharing giant Grab announced it would go public in the United States through a Special Purpose Acquisition Company (SPAC) merger with Altimeter Growth Corp. with a valuation of nearly $ 40 billion.

It will be the largest SPAC transaction and also the largest offering of US stocks by a Southeast Asian company.

It was reported last month that Singapore-based market Carousell was considering listing in the United States via a merger with a blank check 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 up to $ 1.5 billion.

Others who are considering listing in the United States through such an initiative include Singapore-based online real estate company PropertyGuru and mixed martial arts company One Championship.

More recently, Temasek’s Vertex Holdings is also reportedly planning to raise funds for deals by listing a SPAC in Singapore, which may be the country’s first such deal.

According to sources, Vertex is currently working with advisers on the potential Initial Public Offering (IPO) through PSPC. However, details of the blank check company, including its size and timing, have reportedly not yet been finalized as it awaits listing guidelines from the Singapore Stock Exchange.

The Singapore SPAC boom is obvious, but what exactly is it and why is it suddenly gaining popularity?

What is a SPAC?

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A Special Purpose Acquisition Company (SPAC) is essentially a front company created by investors for the sole purpose of raising funds through an IPO to eventually acquire another company.

They have no actual business operations but are created purely to raise capital to acquire an existing private company so that it can bypass the traditional IPO process.

Such a corporate 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 IPO, the money is held in a trust until a predetermined period has passed or the desired acquisition is completed.

In the event that the planned acquisition is not completed or that legal formalities are still in progress, the PSPC is required to return the funds to investors, less bank and brokerage fees.

Because SPACs have no previous operations or financial data to access, their track record depends on the reputation of management teams.

Generally, 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.

Typically, investors who buy during the IPO of SPAC do not know what the eventual acquisition entails, but they have the right to accept or reject the transaction.

PSPC sponsors typically get about a 20 percent stake in the final merged company.

However, SPAC sponsors also have a deadline to find a suitable deal, usually within about two years of the IPO. Otherwise, the PSPC is liquidated and the investors get their money back with interest.

Why are PSPCs suddenly so popular?

According to Refinitiv, there were 165 global SPAC IPOs from January to October 2020, almost 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. PSPC’s average IPO in 2020 was US $ 336 million, up from US $ 230 million in 2019.

SPACs have been around for decades and have often existed as a last resort for small businesses that would otherwise have struggled to raise funds in the open market.

However, they have recently become more prevalent due to the extreme volatility in the markets caused, in part, by the global pandemic.

Many companies have chosen to postpone their IPOs (lest market volatility ruin their stock’s public debut), while some have taken the alternative route to an IPO by merging with a SPAC.

spac vs ipo
Image Credit: PwC

A PSPC merger allows a company to go public and get an influx of capital faster than it would have with a traditional IPO, because a PSPC acquisition can be completed in just a few months compared to registering for an IPO with the SEC, which can take up to three years.

Additionally, in a PSPC merger, the target company is able to negotiate its own fixed valuation with PSPC sponsors.

PSPC’s acquisitions are also attractive to private companies, as their founders and other significant shareholders may sell a higher percentage of their stake in a reverse merger than they would with an initial public offering.

Other benefits for target businesses taking the PSPC route include securing quality investors and sponsors who may be able to help grow their business.

There are also risks to be taken into account

space hazards
Image Credit: CB Insights

Target companies run the risk of having their acquisition rejected by PSPC shareholders, and investors literally go into investing blindly.

Meanwhile, sponsors are rushing to close their deals in an increasingly crowded space. This raises the question of whether some might be content with lower quality acquisitions.

While the PSPC merger process requires transparency regarding the target company, the due diligence of the PSPC process is not as rigorous as a traditional IPO.

PSPC sponsors, who are primarily responsible for finding a viable acquisition within two years and not necessarily the best possible deal, have no incentive to avoid PSPC paying too much for the target company.

While some leading SAVS performed reasonably well, consultancy firm Renaissance Capital found that the average returns for SAVS mergers completed between 2015 and 2020 were lower than the average post-market return for IPO investors. .

SGX could introduce SPAC regulations

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Earlier in March, the Singapore Stock Exchange (SGX) proposed a regulatory framework for PSPCs to be listed on its motherboard and sought feedback from the market, after which it could introduce regulations by this year.

As part of his consultation paper, he said he initially considered introducing the SPAC list in 2010, but “determined it was not the right time” following comments.

The SGX said recent developments have raised some risks regarding PSPCs, in particular excessive dilution for investors and the rush to de-PSPC.

He hopes to remedy this with the framework he proposes and create a “balanced regime” that protects the interests of investors and meets the capital raising needs of the market.

For example, he proposed that SPACs in Singapore have a minimum market capitalization of S $ 300 million (US $ 223 million). This is higher than the requirements in the United States, such as the Nasdaq’s US $ 75 million market cap.

Having a higher market capitalization will ensure that a PSPC is “backed by experienced and quality sponsors and / or management team with a proven track record and reputation,” SGX said, adding that it would also facilitate “the realization of a combination of quality and important companies”.

Other measures include a minimum equity stake of founding shareholders and the ability to complete PSPC mergers within three years instead of the usual two years in the United States.

It also requested that a financial advisor, who is a licensed issue manager, be appointed to advise on the de-SPAC, as well as an independent appraiser to assess the target company.

Featured Image Credit: Futuristic Speaker

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