If you look closely at the local stock market, you’ll realize that most of the counters are either in the financial industry, manufacturing-related, or in the property sector.
Perhaps this is in tune with the characteristics of our city-state. An Asian financial/manufacturing hub whose citizens have to pay high property prices?
It’s market capitalization isn’t much to boast about either. With a market cap of S$900B and 700+ counters, we tend to float between the 20th to 25th position when compared on a global scale.
It also suffers from a lack of IPOs. The ones that come to mind are (surprise) more manufacturing companies, REITs, and other less-intriguing counters.
For us, a good role model would be the city of Hong Kong. Despite it’s size, it has a market cap of US$6T and over 2,500 listed stock counters. Such a feat can be attributed to it’s informal designation as a gateway into China.
Quite recently, SPACs (Special-Purpose-Acquisition-Company) have gotten approval from the SGX to list locally. These “blank-cheque” companies expedite the listing process as compared to a traditional IPO.
We’ll take the chance to explain more in this article since we can expect the first few listings to trade pretty soon.
What Are SPACs
Unlike a conventional business, SPACs do not have any commercial operations. These entities raise funds through an IPO, and exist solely to acquire or merge with an existing company.
Upon the successful acquisition of the target company, the SPAC will cease to exist. Instead, shareholders of the SPAC will find themselves holding shares of the target company.
However, SPAC sponsors normally do not disclose what companies or businesses they intend to acquire before the IPO. As they need to raise funds from investors first, before starting discussions with prospects.
Which also means that, investors will not know what company the SPAC will acquire when they invest in it. It’s something like a lucky draw, albeit with hints given.
Because the funds raised during IPO are meant to obtain a target company, these monies cannot be disbursed except to conduct an acquisition. In the event the SPAC fails to do so, the funds will then be returned to investors on a pro-rata basis.
While SPACs have been around for the past few decades, they have been experiencing a revival of sorts lately. In fact, there were over 600 SPACs listed in the US last year.
How SPACs Can Help
Singapore’s measly market cap has long been a point of contention among investors and the authorities. A likely reason for this could be due to a lack of innovative companies listed on our local bourse.
Allowing SPACs to list in Singapore is an attempt by the authorities to diversify the products available to local investors. Being a first-mover in this category might also set the stage for other SPACs to list here as well.
For retail investors, these entities can also provide access to companies which would otherwise be only available to private equity.
However it’s also important to ensure the interests of shareholders and SPAC sponsors are aligned. To this end, SPACs listed in Singapore have to abide by some rules.
Rules, Rules, Rules
There’s a lot of information here so we’ll shrink it down to the most important ones;
- Minimum market cap of S$150m. SPACs in Singapore have to achieve a market cap of at least S$150m based on the IPO issue price. This is in line with the minimum market capital under SGX’s IPO rules.
- At least 90% of gross proceeds in an escrow account. IPO proceeds must be held by an independent custodian pending the acquisition. Furthermore, this agent must be a financial institution licensed and approved by MAS.
- Acquisition of a target company within 24 months of IPO. As a general rule, a target company must be acquired within 24 months of IPO. This time frame can be extended by another 12 months subject to certain conditions being met.
- Moratorium on shares held. A moratorium period is enforced on the sponsor’s shares from IPO, until the target acquisition is done. Following which, there will still be a 6 month moratorium period after the acquisition.
- Approval percentages. In order to approve a acquisition, a majority of more than 50% of shareholders and independent directors must vote in favor of it.
- Redemption rights. Upon the decision to acquire the target company, all shareholders regardless of whether they voted for or against the acquisition will be allowed to redeem their shares in the SPAC if they wish to. However, it will likely be at a pro-rated amount dependent on the number of shares and share price.
At the moment, there are only a couple of SPACs en-route to listing in Singapore.
The upcoming one, is Vertex Ventures. This is a SPAC backed by Temasek, and is seeking around S$170m at a price of S$5 a share. The counter intends to hit the market on the 20th of Jan.
Most of it’s shares have already been taken up by institutional investors, with a small amount of 600,000 shares to be offered to mom-and-pop investors. With such a small pool of shares to go around, we’re likely to see a pop on the first trading day in it’s share price.
Management stated that it intends to acquire a company from a pool of interesting sectors. These include;
- Artificial Intelligence
- Cyber Security and enterprise Solutions
- Consumer Internet and technologies
- Financial technologies
- Autonomous driving and new-energy vehicles
- Biomedical technologies and digital healthcare
I do hope that the SPAC performs well going forward. As they hold the honor of being the first SPAC to be listed in Singapore. Failure to do so, will likely put-off interested retail investors.
Other upcoming SPACs include Pegasus Asia, and Novo Tellus Alpha. These candidates have their roots in private equity, and come with their specialized sectors as well.
What Should We Look Out For
A critical component of a successful SPAC would be the sponsor themselves. A solid sponsor would provide a wealth of experience and expertise to the target company, boosting it’s decision-making and future prospects.
We should also be aware of companies which are far from the commercialization stage. In layman terms, these are companies which are not even close to finding a strong use-case for their products or services.
While they can have interesting or appealing traits, the wait for such companies to reach mass-acceptance can be exceptionally long, stretching over many years.
Lastly, the entry price for it’s shares also play an important part. As a rule of thumb, we should avoid paying an exceptionally high price as this would negate the redemption rights investors have for holding it’s shares.
The Turning Point (Hopefully)
If this venture goes well, we should see more SPACs queuing up to IPO in Singapore. This will generally have a positive effect on the variety of companies offered to retail investors.
Imagine if this city-state were to attain just 10% of the tech and growth counters of the US. This would help to revitalize the SGX, and the market cap would naturally follow suit.
The result would be a boost in trading liquidity and volumes, both of which would benefit Singapore and it’s investors over the long run.