What are SPACs?
If you don’t have time to read through the whole article, you can check out our short version below.
- SPACs are gaining popularity as a way for private companies to list on public markets more quickly
- SPACs are backed by sponsors that range from investment firms to prominent individual investors
- Like other investment instruments, there are pros and cons to investing through SPACs
In mid-April 2021, South-east Asian tech unicorn Grab stole the headlines when it signalled its intention to go public. The ride-hailing and food delivery giant’s decision to list in the US may not come as a surprise but Grab did not choose to do in the tradition manner - filing for an initial public offering (IPO) application.
Instead, Grab decided to go public through a merger with Altimeter Growth Corp, a special purpose acquisition company (SPAC) of tech-focused investment firm Altimeter Capital Management. The route taken by Grab is becoming an increasingly common way for companies to go public.
According to SPAC Research, SPACs have been raising funds at a quicker rate than ever before. In the first quarter of 2021 alone, funds raised through SPACs were just under US$100 billion, exceeding 2020’s then record-breaking total of US$83.4 billion.
Unsurprisingly, SPACs have caught the attention of market regulators outside the US, in particular Asia. South Korea already has listed SPACs while Hong Kong is looking at such listings. In March 2021, Singapore Exchange (SGX) announced a regulatory framework for the listing of SPACs in the city state with a month-long period given for feedback from market participants. SGX hopes to have the framework finalised around mid-2021.
With commentators suggesting that 2021 is primed to the year of SPAC, retail investors should take the time to understand more about such entities and the role they play in public markets.
What are SPACs?
Also known as "blank cheque" companies, SPACs are shell companies. This means SPACs do not have active business/commercial operations or significant assets. Instead, SPACs are established with a mandate to raise funds in order to acquire a private company in future. SPACs are backed by sponsors that range from established investment firms to prominent individual investors.
Similar to the traditional IPO process, a SPAC lists by selling shares and warrants. The latter is a security that allows its holders to purchase more shares of a SPAC later at a pre-determined price.
Because investors who purchase shares and warrants in SPACs do so with little or no knowledge of how their money will be used, SPACs are often referred to as “black cheque” companies.
Through SPACs, promising private companies like tech unicorns and even electric vehicle manufacturers are able to bypass the traditional IPO process, shortening the time taken to go public. The traditional route to a public listing is often time-consuming as companies need to set up investor roadshows, have meetings with institutional investors as well as have financial statements scrutinised by regulators. Overall, this process usually takes 6-12 months.
SPACs may have gained a lot of attention of late but these entities have been around since the early 1990s and were seen as options for small companies desperately wanting to go public. Interest in SPACs waned in the late 1990s when there was a jump in small-cap companies listing through the traditional IPO process.
Much of why SPACs are moving into mainstream investment circles boils down to increasing demand, private equity players looking to exit their investments and increased regulation making them safer. The Covid-19 induced downturn has also led to companies searching for less traditional means to access capital.
SPACs had a blockbuster month in March 2021 where over 100 deals were closed. However, there might be roadblocks ahead as market regulators in the US have issued a guideline that could resulting in SPAC warrants classified as liabilities instead of equity. If warrants are classified as liabilities, they would need to be evaluated and valued every quarter as opposed to being done only at the start of the SPAC.
These worries have seen SPAC deals dwindle for April 2021.
The pros and cons of SPACs
As with all types of investments, there are pros and cons for individuals or institutions when investing through a SPAC.
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Bloomberg, “Grab’s $34 Billion SPAC Deal Puts Southeast Asia Tech on the Map,” (2021, Apr 12). Retrieved 17 Apr 2021.
CBInsights, “Who Benefits – And Who Doesn’t – From A SPAC,” (2020, Nov 5). Retrieved 17 Apr 2021.
CNA, “Singapore Exchange may allow listing of SPACs but with restrictions,” (2021, Mar 31). Retrieved 14 Apr 2021.
CNBC, “SPACs break 2020 record in just 3 months, but the red-hot industry faces challenges ahead,” (2021, Mar 19). Retrieved 17 Apr 2021.
Nikkei Asia, “Singapore Exchange to prepare for $222m SPAC listings,” (2021, Mar 31). Retrieved 17 Apr 2021.
Russell Investments, “Watching the equity SPAC-tacle,” (2020, Sep 24). Retrieved 14 Apr 2021.
Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability