Prolific tech investor Bill Gurley called SPAC the topic du jour in Silicon Valley, and he’s right. Special purpose acquisition company, the term is a mouthful. In layman terms, it’s another word for a blank check company.
A SPAC is a blank-check company that is formed for the sole purpose of merging or acquiring other companies
Now, a SPAC is not a new concept and has been around for quite some time. However, it has risen to mainstream adoption and popularity this year, particularly post pandemic. In 2020 alone, over US$34 billion have been raised via SPACs in the US. And we’ve got a couple of months left to go .Experts say it is SPACs will likely finish the year over 300% higher compared to 2019. That’s a significant increase.
Maybe you’ve heard it mentioned in passing or read about it somewhere and suddenly Peter Thiel has set up his own SPAC. For a lot of “industry outsiders”, this brought the SPAC attack more into the mainstream.
We’ll be honest, we’re learning about SPAC as we go. Read ahead to know more about what it actually is, why the IPO model might be broken and when (if ever) we can expect a Thai company to tread this path.
What is SPAC
A SPAC is an investment vehicle that essentially functions as a blank cheque company that typically raises capital through private investors before raising money through an IPO. With its IPO capital, it then looks for private firms to buy. The private firm then becomes acquired by the Spac and is then also publicly listed.
Everyone including high-profile names on Wall Street such as hedge fund billionaire Bill Ackman and former Citigroup dealmaker Michael Klein have turned to SPACs recently.
Some are even going as far to saying that the IPO model is broken. According to investor Bill Gurley, the traditional IPO process does not use a market-based approach to efficiently match supply and demand and to discover price.
What else? Access. Most potential buyers of stocks are blocked out of the IPO process. Access is limited to the best clients of the investment bank.
A SPAC directly tackles these shortcomings.
Benefits of a SPAC compared to a traditional IPO:
- SPACs have a much lower cost of capital versus a standard IPO. Even before negotiating terms, the SPAC is a cheaper way to go public (because of systematic underpricing).
- Direct access to primary capital
- Faster way to go public
- Founders have more control over the deal
- Spacs also offer investors relatively short holding periods, as most vehicles are wound up in a couple of years if they fail to find a target.
- This is the opposite of Private Equity, for example, where your money can be locked up for 10 years and you’d have no say how the money can be invested.
- Investors get to vote on takeovers and can get their money back if they disapprove of a deal.
Post Pandemic Popularity
SPACs are actually not a new thing. First invented in 1980s as ‘blank check‘ companies, they did not have a very solid reputation. They were later reformed in the early 2000s, and again in 2011 making them a more credible investment vehicle. Now, SPACs are legitimized with the interest of blue chip companies
According to Pitchbook, the amount of SPACs in the US rose drastically to over 100 in 2020 from just 46 in 2019.
How did the pandemic push the popularity of SPACs? It’s pretty simple. When Covid happened, it slowed down a lot of companies’ path to go public, and many of them need a quicker, frictionless way out the door. There are investors who are willing to give these companies the push.
With a SPAC, you could be public in two-months from when you start the process, assuming that timeline is important to your company.
As SPAC king Chamath Palihapitiya said’, “SPACs will revive a shrinking stock market concentrated in FANG.” This notion may be optimistic, but he has a point.
Last week, we wrote about how the tech stock rally essentially carried the index during the height of the pandemic, and this will likely have long term effects. If a SPAC is able to bring in diversification, as well as provide companies with an exit option beyond an IPO, it may stimulate the markets.
Fun fact: Even US food delivery startup Postmates received two SPAC offers before deciding to go with Uber’s $2.65 billion acquisition.
An ETF for SPAC Index, IPOX was even launched at the end of July and has now outpaced the S&P 500 performance. It’s not all fun and good always though, as another SPAC ETF fund that was launched in 2017 shut down due to “high risk”.
With IPOX, it works exactly as an index fund does. Investors can participate in an index that tracks SPAC companies, designed to hold 30-50 of the most liquid based on daily equity turnovers. SPAC index is currently up 8.2% since July vs the S&P 500 Index’s +3.4%.
Granted, all investments pose some degree of risk. SPACs are becoming a phenomenon, but retail investors need to study up themselves to learn more about the potential downside.
SPACs in Asia
In Asia, Singapore and South Korea are the only markets that embrace SPACs.
A Singapore-based firm, Tiga Investments, founded by the head of of Farallon Capital’s Asian business, is preparing to launch the first SPAC in the country. Korean private equity firm ACE Equity Partners has also recently launched a US$200 million listed SPAC to hunt for IT infrastructure software sector.
The objective of investors is the same across the globe; low interest rates and markets amid central bank-bestowed liquidity, which has given rise to a desperate search for yield among investors.
It will be some time before SPACs trickle to Southeast Asia, we think.
The opportunity could be there there, Thai companies can expand beyond winning locally and through an IPO, which may also give them more pathways to attractive exits. This could apply to tech companies in Thailand, as IPOs still remain an untrodden path for the sector.
Many founders in Asia are beginning to explore a SPAC as a viable exit strategy, following the SoftBank Hangover that may have casted the industry; where VCs worry about overpaying and founders worry about a down round.
We mentioned Peter Thiel’s Bridgetown Holdings at the beginning of this article, the SPAC targeting Southeast Asian companies that are raising US$500 million to target firms in the tech, media and financial services sectors. If successful, it will validate the region’s appetite for growth as well as prove that demand is coming from investors in the tech/media sectors.
“As SPACs allow for companies to customise their entry into the public markets, they can be helpful for companies that may have a longer-term growth story,” said Chia Jeng Yang, Principal at Singapore-based Saison Capital to tech publication e27.
Implications of SPACs
On the flip side, startups may not see much of SPAC activity in Southeast Asia, as these deals are typically geared towards larger-soon to be merged companies to eliminate the pricing uncertainty that comes with an IPO, according to e27.
But we know this. There is always a side of risk served with a plate of opportunities and upsides.
There are various implications to the SPAC model. One implication is that the average retail investor (new to SPAC) has to take precautions. Most of the time, they do not know what firms the SPAC will be buying prior to investing in it. Even though you have an option of withdrawal, it’s probably best if you get it right the first time round.
Experts are becoming concerned that if too many bad deals get approved in the frenzy, it will give SPACs a bad name. Especially when the problem is the target company, not the market itself.
This leads us to the next point: Data shows us that the average SPAC underperformed the S&P 500 3,6 & 12 months after merger completion. This is a true fact, despite the average SPAC outperforming the stock indexes 1 & 3 months following the deal announcement.
This suggests that stocks may perform well from hype & demand surge, but the actual performance of the company fails to justify paying a premium to an S&P 500 index fund.
Ultimately, the SPAC demand may be a strong trend further fuelled by a lack of enthusiasm and cynicism for the S&P 500 beyond technology stocks. Or, it may ultimately become a sustainable way for companies to exit. It may be too early in the game to define a SPAC’s success.
SPACs are currently the hot topic discussed by anyone keeping a pulse on capital markets. It may be a little too early to tell if the current media & deals frenzy leads to a bubble or whether it will be a sustainable path for companies to exit and for investors to invest without a long lock-up.
SPACs certainly reveal certain flaws of a typical IPO process and sheds light on the sheer amount of supply for capital support of companies seeking to accelerate listing.
From SPAC IPO to target identification, to business combination (often changing ticker to reflect target’s name), the whole process usually takes 24 months to complete. Perhaps within the next two years we will have more clarity on whether SPACs will truly outperform and become a new asset class for longer-term investors.