In early April, the giant Grab, which announced its trip, announced its launch public in the US through a merger of a special purpose acquisition company (SPAC) with Altimeter Growth Corp. with a valuation close to 40 billion US dollars.
This will be SPAC’s largest deal and also the largest U.S. equity offering from a Southeast Asian company.
Last month, it was reported that the Singapore-based market Carousell is considering a listing in the US through a merger with a blank check company, according to people who are aware of it.
The startup allegedly works with a consultant on the possible transaction that could value the company up to US $ 1.5 billion.
More recently, Vertex Holdings of Temasek is also planning to raise funds to do business listing a SPAC in Singapore, which could be the first such agreement in the country.
According to sources, Vertex is currently working with advisors on the potential initial public offering (IPO) via SPAC. However, the details of the blank verification company, including its size and timeline, have not yet been finalized, as it expects the Singapore Stock Exchange guidelines to appear.
The SPAC boom in Singapore is clear, but what exactly is it and why is it suddenly gaining so much popularity?
What is a SPAC?
A special purpose procurement company (SPAC) is essentially a shell company created by investors for the sole purpose of raising money through an IPO to end up acquiring another company.
They have no real business operations, but are created solely to raise capital to acquire an existing private company, so that the traditional IPO process can be bypassed.
This business structure allows investors to contribute money to a fund, which is then used to acquire one or more unspecified businesses to identify them after the IPO. Therefore, this type of shell business structure is often called a “blank verification company”.
When the SPAC raises the necessary funds through an IPO, the money is held in a trust until a predetermined period elapses or the desired acquisition is made.
In the event that the planned acquisition is not carried out or there are still legal formalities, the SPAC will have to return the funds to the investors, after deducting the bank and brokerage fees.
Because SPACs have no prior financial operations or 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 and professional Wall Street investors from the world of private equity or hedge funds.
Normally, investors who buy on the IPO’s IPO do not know what the eventual acquisition entails, but have the right to accept or reject the deal.
SPAC sponsors typically get about 20% of the stake in the final merged company.
However, SPAC sponsors also have a deadline by which they must find a suitable agreement, usually about two years after the IPO. Otherwise, the SPAC will be liquidated and investors will recover their money with interest.
Why are SPACs so popular?
According to Refinitiv, there were 165 global IPO IPOs from January to October 2020, almost double the global IPO IPOs issued in 2019 and five times in 2015.
Not only does the number of SPACs increase, but each SPAC raises more capital through IPOs to allow them to buy larger private companies. The average IPO IPO in 2020 was US $ 336 million, compared to US $ 230 million in 2019.
SPACs have been around for decades and often existed as a last resort for small businesses that would otherwise have had trouble raising money in the open market.
However, they have recently become more frequent due to extreme market volatility caused, in part, by the global pandemic.
Many companies chose to defer their IPOs (for fear 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.
A SPAC merger allows a company to go public and get a capital inflow faster than it would with a conventional IPO, as the acquisition of SPAC can be closed in a few months before registering a IPO in the SEC, which can take up to three years.
In addition, in a SPAC merger, the target company may negotiate its own fixed valuation with SPAC sponsors.
SPAC acquisitions are also attractive to private companies because their founders and other major shareholders can sell a higher percentage of their property in a reverse merger than they would with an initial public offering.
Other benefits for target companies taking the SPAC route include attracting quality investors and sponsors who can help grow their business.
There are also risks to consider
Target companies run the risk of their acquisition being rejected by SPAC shareholders, and investors are literally blind to the investment.
Meanwhile, sponsors are rushing to make their bids in an increasingly crowded space. This raises concerns about whether some might settle for lower quality acquisitions.
Although the SPAC merger process requires transparency regarding the target company, the due diligence of the SPAC process is not as rigorous as a traditional IPO.
SPAC sponsors, whose primary task is to find a viable acquisition within two years and not necessarily the best possible offer, are not encouraged to prevent the SPAC from overpaying the target company.
While some high-profile SPACs have performed reasonably well, consulting firm Renaissance capital found that the average return on SPAC mergers completed between 2015 and 2020 was lower than the average after-market return of investors from a IPO.
SGX could introduce SPAC regulations
In early March, the Singapore Stock Exchange (SGX) proposed a regulatory framework for SPACs to include in your motherboard and look for market suggestions, after that you could introduce regulations for this year.
As part of his consultation paper, he said he first considered introducing the SPAC list in 2010, but “determined it was not the right time” after the comments.
The SGX said recent developments have generated certain risks on SPACs, in particular undue dilution for investors and the rush to eliminate SPACs.
It hopes to address them with its proposed framework and create a “balanced regime” that safeguards the interests of investors and meets the capital raising needs of the market.
For example, he proposed that Singapore SPACs have a minimum market capitalization of A $ 300 million (US $ 223 million). This is higher than the requirements in the United States, such as the market capitalization of Nasdaq for 75 million US dollars.
Having a higher market cap will ensure that an SPAC is “supported by experienced and quality sponsors and / or management teams with a proven track record and reputation,” said SGX, who added that it would also facilitate “the consummation of a combination of quality and considerable business “.
Other measures include minimum participation in shares of the founding shareholders and allowing SPAC mergers to be completed within three years instead of the typical two years in the United States.
He has also asked for the appointment of a financial advisor, who is an accredited emissions manager, to advise on the de-SPAC, as well as an independent evaluator to assess the target company.
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