SPACs' new challenge to convince investors their money is well utilised

Financial constraints: Vijay Sharma, founder and chairman of One97 Communications Ltd, posing for a photograph at the company’s headquarters in Noida, Uttar Pradesh, India. One97 operates PayTM. In his early days, he said that getting funds was a major problem to the extend that it had affected his marriage proposals. – Bloomberg

Being an entrepreneur is tough when you don’t have the funds or a platform to raise money to undertake your business plan.

However, it is even worse when you have an array of financing packages in place but are unable to convince investors of the idea or the business proposal.

This best describes the predicament of CLIQ Energy Bhd and Sona Petroleum Bhd, the two companies listed under the special-purpose acquisition company (SPAC) banner on Bursa Malaysia.

A SPAC is a listed vehicle that allows professional managers who have the capability but are hindered by the lack of capital to become entrepreneurs.

Since capital is the biggest problem for entrepreneurs, a SPAC allows for funds to be raised from the public by professional managers to be used in their business.

Essentially, it allows for entrepreneurship to thrive without having to worry about finances.

In return, the professional managers, who would own a portion of the company for almost free, are required to deliver results that commensurate the risk taken by investors.

The amount of money raised depends on the calibre of the management team and the kind of business they are going into. Hibiscus Petroleum Bhd was the first SPAC to be listed and it raised RM235mil.

CLIQ raised RM364mil, while Sona managed to get RM550mil. Reach Energy Bhd, which is also in the oil and gas (O&G) industry like the other three companies, raised a hefty RM750mil.

The latest SPAC to be approved for listing – Red Sena Bhd – however, is not from the O&G industry. Red Sena, which is going into the food industry, managed to raise RM400mil.

Raising the capital is now the least of the problems, it would appear.

The bigger issue at hand is convincing investors that the money is well-utilised.

CLIQ and Sona, which have proposed to acquire assets to `graduate’ from being a SPAC to a full-fledged O&G company, are fighting to gain investor confidence on the deal proposed to shareholders.

Based on the current share price of the companies that is below the total initial public offering price (shares and warrants), it would appear that the shareholders of both CLIQ and Sona are not convinced that they are getting the best value for the money to be spent.

This is only to be expected, given the bearish sentiment in the O&G industry.

But every asset has a value which makes it attractive. It is the duty of the managers - who will become full-fledged entrepreneurs if the qualifying asset gets the nod of the shareholders - to convince the investors.

After all, entrepreneurship is all about giving investors the right value for the money invested. It is something that entrepreneurs find tough to do - more difficult than getting the finances.

Vijay Sharma (pic) of India, who has set up Paytm, a digital payment company that connects millions of consumers and companies offering services such as cinema tickets, clothes and mobile phones, can probably testify to that.

In an interview with a well-known financial publication recently, the entrepreneur related how in his early days, getting the funds was such a major problem to the extent that it had affected his marriage proposals.

Vijay had taken a loan of 800,000 rupees (RM51,700) to fund his venture. The loan was taken at a high interest rate and he struggled to make the payments for it. He related how his attempts at marriage were turned down by the parents of his prospective brides because of his financial constraints.

In 2011, Vijay first heard Jack Ma of Alibaba speak and it captivated the graduate from Delhi College of Engineering. In 2014, Vijay met up with Ma in a meeting that lasted more than two hours when it was originally planned for less than 30 minutes.

Alibaba invested in Paytm and now it is one of India’s most valuable start-ups with a valuation estimated at US$2.5bil, according to a report.

In his early days, Vijay had an idea on how to make money from the digital age but did not have the funds. Luckily for him, Alibaba came to his rescue.

Now, the entrepreneur has the funds but faces challenges from the likes of Amazon and Flipkart, companies offering e-commerce on a much bigger scale. In the digital age, economies of scale is of the essence and convincing the market of Paytm’s prospects would be his challenge for now.

Nearer home, the Securities Commission (SC) has come up with various platforms to match entrepreneurs with prospective investors.

The latest platform is the birth of equity crowdfunding firms, which essentially match people with the ideas and those with the capital. It is for unlisted companies.

The equity crowdfunding structure is not entirely new in the business world. It has been in existence in an informal manner. Now, under the guidance of the SC, there are companies that offer to match the entrepreneur with the capital.

Next year, the SC will be introducing Peer-2-Peer schemes to fulfil funding needs for companies that are unable to get the loans from the banks.

In an environment where capital markets are flushed with liquidity, funding maybe an issue. But entrepreneurs’ biggest task is to convince investors that the money forked out is worth the returns.

Note on the second Penang Bridge

In an article on Oct 24 entitled `Courting China, the British way’, this column had touched on the second Penang Bridge and stated that there was neither a technology transfer nor local firms having benefited from the spillover effects of the job.

The column also stated that the Chinese contractor, China Harbour Engineering Company, had brought in everything from China right down to the nuts and bolts, prompting a local contractor to comment that the only benefit for local industries had come from the supply of mineral water bottles.

Jambatan Kedua Sdn Bhd (JKSB), the concessionaire for the second Bridge, has said that the above is NOT TRUE.

It says that more than 90% of the construction materials were sourced locally, as the infrastructure was a concrete bridge where aggregate, cement and reinforcement are easily available.

JKSB only used Chinese heavy machinery such as the world’s biggest piling machine and floating cement mixers and their operators for the foundation substructure construction and the main navigation span.

Most of the sub-contractors of the Chinese company were also local companies, including the chief resident engineer and his staff.