The winds of change are coming to the Singapore bourse.
The market was lukewarm for initial public offerings (IPOs) for most of 2021, but the pace picked up close to the end of the year with the listing of two large REITs — Daiwa House Logistics Trust (SGX: DHLU) and Digital Core REIT (SGX: DCRU).
This week, investors will see a new type of IPO make its appearance in the local stock market.
Special purpose acquisition companies, or SPACs, will make their debut later this week.
SPACs are essentially “shell” companies that raise capital through IPOs to acquire an operating business or asset in a business combination.
The SPAC entity is established and financed by founding shareholders known as “sponsors” that form the management team in charge of sourcing for a suitable target.
Once a suitable business is found, the SPAC will undergo a process called “de-SPAC” (akin to a merger), and the new operating business will then take over.
SPACs are different from typical IPOs where operating businesses have a track record of generating revenue and profits before going to market.
The difference raises the question: should investors park some money in SPACs?
What are the benefits and risks associated with this new type of IPO?
The SPAC candidates
Vertex Technology Acquisition Company (VTAC) will go down in history as Singapore’s first SPAC listing.
VTAC will offer 11.8 million units in total at S$5 per unit, with 600,000 offered to retail investors.
The SPAC’s sponsor, Vertex Venture Holding Ltd (Vertex), is a leading venture capital firm that is backed by investment firm Temasek Holdings.
Vertex manages an active portfolio of more than 200 portfolio companies and over US$5.1 billion worth of assets under management (AUM).
VTAC will be listed on 20 January (Thursday) at 2 p.m.
The second IPO candidate, Pegasus Asia, will offer 25.6 million shares, also at S$5 each, with 600,000 allocated for Singapore retail investors.
Pegasus Asia’s sponsor is European asset manager Tikehau Capital in partnership with Financiere Agache (LVMH CEO Bernard Arnault’s family office).
Tikehau Capital is an alternative asset management group with €30.9 billion of AUM as of 30 June 2021, while Financiere Agache holds a portfolio of diversified financial investments spanning equities, private equity, and venture investments.
Pegasus Asia will commence trading on Friday morning, 21 January 2022.
An attractive growth investment opportunity
SPACs offer investors an opportunity to invest in early-stage, fast-growing businesses.
Singapore stock market investors are currently bereft of such opportunities and the listing of these SPACs opens up a wider choice for them.
VTAC has stated six investment themes that it will focus on that are at the forefront of technological transformation.
These are (in no order of merit) — cyber security and enterprise solutions, artificial intelligence, consumer internet and technologies, financial technologies (fintech), autonomous driving and new-energy vehicles, and biomedical technologies and digital healthcare.
For Pegasus Asia, its focus will be on technology-enabled sectors including, but not limited to, consumer technology, fintech, insurance technology, health technology, and digital services.
The good news is that SPACs have a sufficiently long timeline of 24 months from their IPOs to complete its de-SPAC, and an extension of 12 months can be given subject to the fulfilment of certain conditions.
Hence, SPAC investors need to be patient to see their investment come to fruition once the sponsor has located a suitable company for a merger.
The sponsor’s strength
SPACs have the disadvantage of having no historical financials to disclose and also no operating history.
Therefore, a key factor that investors need to rely on is the strength and reputation of the sponsor(s).
A sponsor with a great track record of managing investments in the venture capital and private equity space will be able to tap on this portfolio of investments for a potential de-SPAC.
Also, a sponsor that is backed by reputable institutions has stronger financial backing in case more funds need to be raised to enable the de-SPAC process to take place.
Beware of the risks
As with any investment, there are risks to watch out for.
The main risk is investors’ inability to determine if a SPAC can and will find a suitable target for a merger within 24 months.
In essence, SPAC investors are keeping the faith by parking their money in a shell company with no operating history or viable business.
There is also the risk of the sponsor acquiring a sub-par business and falling short of investors’ expectations concerning the de-SPAC.
Additional capital raising may also be required for the SPAC to consummate the de-SPAC, leading to dilution risk for existing shareholders.
Finally, there is the risk of liquidation should the SPAC be unable to find a target for de-SPAC.
Although investors’ monies are kept in a secure escrow account at IPO, expenses need to be incurred for the management team and sourcing of a suitable target.
Upon liquidation, the SPAC investors may get back less than what they originally invested, not to mention the opportunity cost that comes with parking their money in an investment that has gone sour.
In addition, there’s also the risk of a SPAC performing poorly even after a successful de-SPAC.
As an example, consider ride-hailing conglomerate Grab (NASDAQ: GRAB).
The company went through a SPAC merger late last year and started trading as high as US$13 at the open.
However, its shares have now more than halved from that level and closed at just US$6.04 recently.
Get Smart: Weighing the pros and cons
The decision on whether or not to invest in a SPAC boils down to investors’ confidence in its sponsor and consideration for the risks involved.
Investors should weigh the pros and cons of SPACs and be mindful of their portfolio allocation should they choose to proceed.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
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