As startups grow their revenue and user bases after several rounds of private fundraising, they have a variety of exit options including acquisition by a larger company or going public, either through a traditional Initial Public Offering (IPO) or a direct listing. A new option, SPAC (Special Purpose Acquisition Company), has recently gained popularity as an exit option to go public for startups, especially in the United States.
Deep Dive into SPAC
Overview of SPACs
A SPAC is a company that is formed to raise funds through an IPO with a purpose of acquiring a private company and taking the target company public. It is normally established by a group of investors called sponsors, and it must be registered with the Securities and Exchange Commission (SEC). These sponsors have 2 years to find a target company while the funds are placed in an interest-bearing trust account. If they cannot find a target company within the given period, they must liquidate the SPAC and return the money to investors.
One of the most high-profile SPAC deals is the acquisition of 49% of Virgin Galactic for $800M by ex-Facebook executive Chamath Palihapitiya’s SPAC Social Capital Hedosophia Holding in 2019. An upcoming SPAC deal is the merger between SoFi, a consumer financial services startup, and Social Capital Hedosophia Holding Corp V, which would value the company at $8.65B. Recently, Pershing Square Tontine Holding debuted as the largest SPAC with a total raise of $4B in July 2020.
Target Companies for SPACs
The ideal candidate for a SPAC contains 3 qualities:
- Growth-stage companies operating in a high-growth industry which have the operations and support from the management team to go public;
- Companies that are looking for fast alternative means with limited market and timing risk to go public and;
- Companies that are searching for access to capital or liquidity routes during uncertain equity and debt markets.
Moreover, the size of target companies may vary depending on how much money the SPAC can raise. But smaller companies, typically with less than $100M annual revenue, tend to go public via SPAC as they have high growth prospects, but may not meet the qualified threshold for an IPO. Therefore, mature startups are attractive targets for the SPAC sponsors to take public.
Even though SPACs have been around for decades, 2020 was a year to be remembered for SPACs. The key reason is because investors are searching for yield in a low interest rate environment with a volatile stock market. According to SPACinsider, a total of 248 SPACs filed for IPO, raising a total of $83B in gross proceeds in 2020. Compared to 2019, 2020 had more than 4 times the number of SPAC IPOs, and 6 times higher fundraising amount. The number and size of SPACs are getting larger than ever before. It is also becoming more common for VC funds to launch their SPAC to bring their mature portfolio companies public as for the case of FirstMark Capital. Prominent underwriters such as Goldman Sachs, Credit Suisse and Deutsche Bank are stepping into the game.
Advantages of SPACs
- Cheaper: the cost of SPAC IPO is 2% of the gross proceeds
- Speed to market: the faster process of SPAC ranges from 2-4 months can accelerate the company’s market entry
- Investor’s assurance: The SPAC secures a long-term group of investors through private placement in public equity instead of sell a company at IPO roadshow
- Higher sale price: by selling to a SPAC, the sale price is 20% higher than that of private equity deal as SPAC is not mainly driven by ROI first approach and allows the company’s management to evaluate opportunities from both short-term and long-term perspective
- Price transparency: For investor, the price of SPAC is not determined a night before the IPO
Disadvantages of SPACs
- Uncertain investment: the investors do not know the target company of the SPAC, so it is impossible to evaluate the investment opportunity
- Potential long lag time: there might be a long interval between the time the investors put money in the SPAC and when it acquires a target company
- Mixed track record: the performance of the merged SPAC hardly beats the market index and often underperforms, particularly 3-12 months after the acquisition
- High dependence on sponsor’s credentials: Investors have to largely rely on sponsor’s profile as attractive SPAC candidates would choose high-profile sponsors to acquire and manage the company
Going Public via SPAC VS IPO
In spite of the same end goal, there are several differences between going public via SPAC and traditional IPO in terms of cost, process, time, and risks.
The following table demonstrates the key differences between the 2 methods:
A Glimpse of SPACs in Asian Markets
The concept of SPACs already exists in Asia as Hong Kong, Malaysia, and South Korea have been adopting SPAC for the past 5-6 years. For instance, in 2014 Reach Energy completed the country’s largest SPAC-enabled listing of $229M in Kuala Lampur, Malaysia. Hong Kong has gradually emerged as the second largest area for SPACs as its investment community has better insights in China, Asia Pacific, and Southeast Asia (SEA). Therefore, Hong Kong SPACs have a better chance of acquiring high potential startups compared to the rest of Asia.
According to the Asia Times Financial, the Asia Pacific region has increasingly embraced the use of SPACs as an exit option for mature technology firms. Compared to the number of transactions in 2019, the number of SPAC IPO transactions were four times higher in 2020.
SPAC transactions in Asia are expected to be more common in the coming years. Various investors in the region have been active in this market. For instance, Anthony Lueng, the former finance secretary of Hong Kong and an ex-Blackstone Asia executive, is regarded as the father of Asian SPAC investments. He bought United Family Health in 2019 via his SPAC which had raised a total of $1.5B from the New York Stock Exchange.
Southeast Asia is no exception as SEA’s tech unicorns have received growing interest from SPAC sponsors. Grab and Gojek (ride-hailing and food delivery giants in SEA), Bukalapak (leading e-commerce firm in Indonesia), and Traveloka (SEA’s largest online travel app) have all been approached by several SPACs. Tokopedia, another prominent e-commerce player in Indonesia, has received acquisition interest from Bridgetown Holdings, a $550M SPAC backed by Richard Li, a Hong Kong businessman, and Peter Thiel, a Silicon Valley investor. If this deal is successful, it may inspire other tech unicorns in SEA to follow suit, sparking a boom of SPAC transactions in SEA.
The Implications of Future Fundraising in the Startup Space
Given the surging trend of SPAC exits, there are several implications that we can expect to see in the startup space as follows:
- It is a significant opportunity for SEA’s mature startups that may not yet meet certain IPO thresholds to get listed in the U.S. stock markets where the company can anticipate deeper liquidity than their home country;
- Additional channels to access capital markets and exit opportunities gives founders capital to initiate new ventures, which could further boost SEA’s startup ecosystem;
- High number of SPAC IPOs could potentially shift the bargaining power to the target companies;
- VC firms could raise SPACs of their own to bring late-stage portfolio companies public, which could further accelerate the local tech IPO;
- Nevertheless, exchanges in SEA are at a disadvantage of losing local tech IPOs either they do not allow SPAC IPOs or smaller markets compared to the U.S., meaning that the value of SEA startups are seized and gained by foreign investors. Local retail investors will not have the opportunity to invest in these high-growth startups in the region that they are familiar with.
Startups need to carefully weigh the costs and benefits of going public via SPAC. Even though access to the capital markets is crucial to grow in an increasingly competitive environment, it eventually comes down to the readiness of the company’s performance and the management team in order to go public successfully.
Author: Wanwares Boonkong
Editor: Krongkamol DeLeon
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