SPECIAL purpose acquisition companies or SPACs have become a hot trend on Wall Street.
The amount of money raised by SPACs in the past 12 months has topped US$120bil, going by Bloomberg data. The fever is spreading closer to home. Indonesia’s Gojek and Tokopedia are considering floating SPACs in the US, instead of taking an initial public offering route.
Last October, the first exchange-traded fund (ETF) dedicated to SPACs called Defiance Next Gen SPAC made its debut on the New York Stock Exchange.
Now Singapore is toying with the idea of allowing SPAC listings this year.
SPACS were first introduced in Malaysia in 2009, making our market a pioneer for such listings in this region. The first SPAC that was listed in Malaysia was an oil and gas outfit Hibiscus Petroleum Bhd back in 2011.
SPACs also dubbed cash shells or blank cheque firms are formed by a group of individuals to raise funds through an initial public offering (IPO) with the purpose of using the proceeds to acquire assets or businesses.
Malaysia’s experience with SPACs have been chequered. Only a handful of SPACs were listed on Bursa Malaysia and only two graduated to become full-fledged listed companies namely Hibiscus and Reach Energy Bhd.
The other SPACs, namely, Sona Petroleum Bhd, CLIQ Energy Bhd and Red Sena Bhd had to be delisted with proceeds returned to shareholders. These SPACs either did not meet the three-year timeline to close a deal or failed to get shareholders approval for their maiden acquisitions.
Since the listing of Red Sena in 2015, there have been no new SPACs coming into the local market.
It is worth noting that there were several notable SPACs that did not manage to get listed. Some were rejected by the regulator while others pulled out their applications, likely due to onerous rules that they needed to adhere to. These included plantation focused SPAC Chemara Palmea Holdings Bhd, healthcare-related Asian Healthcare Group, Matrix Capacity Petroleum Bhd (oil and gas), TerraGali Resources Bhd and Australaysia Resources and Minerals Bhd (both in the mining sector).
Industry observers have pointed out that the strict rules imposed by the SC were the reason why many SPACs did not get listed. But SPACs here were designed by the Securities Commission with strict rules, such as the ability of investors to get their cash back at the point of voting for the maiden acquisition.
Fast forward to today, and with SPACs being back in vogue, especially in the US, will we see a revival of these listings on Bursa Malaysia?
Former banker Ian Yoong who was a promoter of Red Sena and one of its directors, says he understands that there are a number of parties looking to list SPACs on Bursa Malaysia. Like most of the recently listed SPACs in the US, these promoters are looking to have a technology focused SPAC.
However, he opines that SPACs could be used as a tool to list businesses that might don’t fulfill all the listing requirements.
“Malaysia might encourage the formation of SPACs to fund state-owned enterprises, for example. SPACs could be used to fund infrastructure development and projects that are in the national interest, ” Yoong suggests.
Yoong also suggests that the listing guidelines of SPACs could be looser in the sense that it needn’t place too much emphasis on the experience of its promoters.
“SPACs do not and should not require experienced managers in that particular field at the IPO stage. It does not make sense paying for a senior management team from the outset.
“Good managers can be employed when the asset has been acquired, ” he says.
In an email reply to StarBizWeek, the SC says that the introduction of the SPAC framework in 2009 was to facilitate fundraising by companies with no track record but are managed by a team of highly skilled promoters and management team.
“The framework enabled these companies to raise funds from the capital market through an IPO, in order to grow the company through the acquisition of a viable business, ” the regulator says.
SC says SPACs brought variety into the financial market while safeguarding investors’ interests and promoting confidence.
Low interest rates drive interest
As far as SPACs in the US are concerned, it has been driven by the low interest rate regime there.
Though not a new financial instrument, SPACs raised a whooping US$80bil (RM326mil) from 237 deals in 2020 surpassing the record US$13.6 billion raised in 2019 from 59 IPOs.
In just three months in 2021, SPACs have raised more than US$38bil for 128 SPACs IPOs, which nearly half of the value raised last year, according to SPACInsider.
SoftBank filed for two SPACs that are targeting to acquire and manage a business in a technology-enabled sector.
Venture capitalist Chamath Palihapitiya, who is also known as the king of SPACs, is involved in 12 SPACs.
He launched six SPACs, out of which three have completed deals, one has a pending merger and two are still searching for targets. He is involved in another six as an investor.
This year’s SPACs line up include the Bill Gates-backed portable ultrasound start-up Butterfly Network. DNA-testing startup 23andMe is reportedly in talks to go public through a US$4bil deal.
But how long will the euphoria last?
Juwai IQI chief economist Shan Saeed says the current trend of money flowing into SPACs could be a “herd mentality” and many investors don’t really fathom the cost structure of SPACs.He points out that while SPACs are a clever financial innovation that provides a cheaper and faster path to becoming a public company than a traditional IPO, there is a lot of misunderstanding about the economics of SPACs.
“Analysis by Michael Klausner Professor of Business and Law at Stanford Law School, points out that investors that hold shares at the time of a SPAC merger will see their post-merger share prices drop on the average by 33%.
“SPACs do not provide stability to investors’ funds in the long run. There is a dearth of audited reports, fair valuation analysis and strategic direction. Hence it is difficult to put a value on these vehicles, ” Shan says.
The Economist has pointed out that if interest rates were to rise suddenly as a result of inflation, and the music were to stop in markets, the SPAC boom might end abruptly.
Second is the oftentimes unfair structure of SPACs where its promoters tend to receive shares at a much lower cost than the general investors.
Over the years, the presence of badly designed SPACs is part of the reason why these assets have underperformed the markets in the US. The good news is that some SPACs in the US are devising their own rules which are more fair and these are likely to do better.