Will spacs improve exit prospects in Southeast Asia?

The special purpose acquisition companies (spacs) frenzy took Wall Street by storm last year. Also known as blank check companies, there were over 250 spac filings raising more than US$75 billion ($102.85 billion) recorded in 2020. The momentum continued in Q1, when a total of US$88 billion were raised by 320 spacs, according to S&P Global Market Intelligence.

In Asia, Singapore has allowed spacs to list on the Singapore Exchange since early September, kicking off the race to issue the first of such listings in the city-state. Names such as alternative asset manager Tikehau Capital, Temasek-backed Vertex Ventures, buyout firm Novo Tellus Capital Partners and private equity firm Turmeric Capital have reportedly filed listing applications but to date, there is no formal lodgement of a prospectus yet.

Hong Kong’s financial regulators are still considering whether it should follow, but with tighter restrictions. Indonesia has also been reported to mull over spac listings on its local bourse, yet details have been sparse.

Malaysia is one of the few Asian countries which has had a spac framework since 2009. Amid development in other markets, however, its capital markets regulator is currently reviewing the framework for greater efficiency.

Usman Akhtar, partner at Bain & Co, says he is interested in seeing whether this would lead to a growth in success stories of public debut for fast-growing homegrown tech companies in the region, be it via spac or a traditional IPO route. This would bring even more attention to the space in Southeast Asia, because general partners (GPs) will start to feel like the region has got a vibrant exit environment.

With easier access to a spac listing, will companies in Southeast Asia go public earlier, instead of staying private for longer? It is a possibility, says Johnny Lim, director at Resource Law. He explains that in the ordinary course, a fast-growing company would go through a seed financing stage, followed by venture capital and private equity funding (in the form of Series A, B, C as well as potentially D, E and F funding rounds).

Each new funding round would be accompanied with a higher valuation, and a round of negotiations with new or existing investors. This goes on until it reaches a certain stage of maturity to be sufficiently attractive for a trade sale or it is able to achieve the financial condition required for an initial public offering (IPO).

“With spacs, one possibility is that a fast-growing tech company may grow to a certain size, say at Series C but not be profitable yet. It is likely subject to a longer runway — needing more time and funding to become profitable. At this stage, apart from choosing to grow via the traditional route of Series D, E, F, the company can also consider a business combination with a spac.

“The latter is already pre-funded, and a potentially faster and less-tedious growth path to access the capital markets rather than going through D, E, F then seeking a direct listing. The business combination (or de-spac) would also carry with it the advantages of a spac, particularly the certainty of upfront funding and certainty in valuation,” says Lim.

Akhtar says that a spac listing would provide a fast-growing company with some valuation assurance, therefore also offering some of the benefits that a private market fundraising would typically provide. Therefore, a strong, supportive and healthy spac industry could encourage companies to go public earlier.