31 March 2021

Do U.S. blank-cheque companies hold the key to unlock SE Asian companies’ growth?

As U.S. listed SPACs increasingly seek out new targets for investment outside of the U.S., SPACs may provide a welcome catalyst to help SE Asia’s PE and VC backed companies achieve a long sought after exit.

We gauge reactions from PE sponsors, VC investors and target companies in SE Asia to approaches from SPAC acquirers, and question whether SPACs have a long-term role in institutionalisation of private capital flows into (and returns from) the region.

1. The elusive SE Asian IPO exit

A crude comparison between the number of PE and VC deals and the number of IPOs over the past decade shows the stark reality that an IPO is only achieved in about 10% of PE deals and roughly 0.6% of VC deals. Yet the increasing wealth and demographic trends in the region have already precipitated a number of fast-growing privately held companies.  These companies are backed by investors who ultimately would like to obtain returns through an exit.

Over the past few months, as SPAC mania has spread from the U.S. to the rest of the world, the promise of a SPAC related IPO has captured the imagination of investee companies and investors.  The seal of approval obtained from a U.S. listing and promise of access to significant liquidity through the SPAC merger process and beyond make SPAC acquisitions a compelling proposition.

But For existing investors, who, for reasons outlined below, could still be held captive in the listed entity after a SPAC merger, a SPAC can start to look less like an IPO, and more like a piece of financial engineering that may serve to enrich certain investors, but potentially leaves others feeling short-changed. 

Whilst for target companies seeking to attract SPAC transactions, a key question is not just whether they are sufficiently prepared to operate as a U.S. public company, but whether their current investor base is also sufficiently aligned to enable the company to execute a successful transaction with a SPAC.

This of course, is not a problem that is confined to SE Asia.  But if SPAC transactions are being heralded as a solution to unlock privately held companies, then it is incumbent both on SPAC sponsors as well as key investors in target companies supporting a SPAC-fuelled listing to try to preserve a reasonable balance in the economics of a SPAC transaction.

ASEAN key data points over 2010-2020

GDP

Increased by 50% to US$3 tn

PE funds ASEAN focussed AUM

Increased by 267% to US$20 bn

VC funds ASEAN focussed AUM

Increased by 535% to US$8.9 bn

Total ASEAN PE deals (number/value)

655 deals / US$54.7 bn

Total ASEAN VC deals (number/value)

2,962 deals / US$32 bn

Private Equity backed IPO exits in ASEAN

Total of 75 IPOs

Venture capital backed IPO exits in ASEAN

Total of 19 IPOs

U.S. SPACs as of March 2021

Active U.S. SPACs / Amount in trust

512 SPACs / US$163 bn

Sources: Statista, Preqin, SPAC Research

2. Instant liquidity?

It should come as no surprise that SPAC acquirers have been circling around SE Asia’s most valuable private companies promising a public listing within a handful of months.

Indeed, as COVID-19 continues to dampen traditional investors’ desire to invest in emerging markets, and with the usual trade sale exit route similarly stymied, the stampede of investment bankers introducing shiny new SPACs with fresh funds in escrow waiting to be released from new investors from outside the region, could not have come sooner. 

This is especially the case in certain sectors, where growth companies are still haemorrhaging cash in the current environment and for the regions’ unicorns and decacorns – where so much private and government-linked capital has been invested, that a tepid IPO reception would result in a loss of face for a large part of the investment community.

The ability to pursue a transaction with a SPAC has therefore become a key priority for many management and founder teams in ASEAN and is being touted as a “safe” option to achieve the benefits of a U.S. public listing.  However, even though a so-called “de-SPAC” transaction (i.e. a merger with or acquisition by a SPAC), has become relatively mainstream in the U.S., translating this into the SE Asian context takes significant planning and is fraught with uncertainties that are only beginning to surface.

For instance, due to the interplay between local securities law and U.S. securities laws, a de-SPAC may not instantaneously result in all shares in the target becoming freely tradeable on public markets. 

This can leave an expectations gap between target shareholders, not all of whom will see liquidity at the time of the de-SPAC transaction, or through immediate access to the public markets in the aftermath of the de-SPAC. 

Here, SPAC sponsors may try to plug the gap by cashing out certain investors in order to buy target company investor support.  Yet when it comes to trying to engineer this for a de-SPAC of a VC-funded decacorn, the sources and uses of cash for the de-SPAC transaction may be a hard equation to balance.  As a result, the target company itself may find that its long-awaited public listing is not accompanied by the expected windfall of fresh capital.

3. Four steps to a successful SE Asia de-SPAC and the Singapore advantage

From a SPAC investor’s perspective, this may be their first foray into SE Asia and associated exposure to emerging risk in the jurisdictions in which the target operates.  SPAC sponsors targeting SE Asia for a de-SPAC transaction therefore need to mitigate the risk of investor redemptions.

Removing execution risk for de-SPAC transactions in SE Asia largely boils down to four core elements:

  • Preparation for the de-SPAC. Pushing out the timeline for the de-SPAC to iron out operational matters may seem counter-intuitive, but this is a valuable exercise to increase investor appeal and highlight early-on any deal breakers such as anti-corruption issues.
  • A detailed and insightful due diligence process. This will help to flush out the unique business and regulatory environment in SE Asia, which eventually manifests itself in the “Super 8-K” disclosure document filed with the U.S. SEC.
  • Securing the PIPE. Tapping the regional PIPE market to offset any SPAC investors who wish to redeem is key. In this regard, large pools of family-office funds either concentrated in or ready to be channelled in a tax-efficient way through Singapore, may provide important strategic underpinnings to the success of the SPAC.
  • Anchoring the de-SPAC in Singapore law. Singapore’s common law and sophisticated legal system can provide a robust framework for SPAC mergers, and SIAC international arbitration in Singapore is a tried and tested forum for resolving disputes in the event these arise between the target’s investors.

4. Target investors’ perspectives and reactions

In SE Asia, the current investment environment favours opportunistic transactions and strategic repositioning of investment portfolios.  The reaction from investors to the prospect of a de-SPAC transaction involving their investee companies is still somewhat mixed. 

PE perspective in SE Asia:

PE investors holding early vintage investments may relish the opportunity to liquidate their investment that a de-SPAC transaction ultimately offers.  This is particularly the case in SE Asia, where the opportunity for a trade sale or secondary sale to another PE sponsor is likely to be limited; at least until PE investments really flourish in this region on the scale seen in the U.S., Europe and elsewhere in APAC. 

This in turn is beginning to fuel appetite for PE-sponsored SPACs, who, are willing to navigate the multiple conflicts of interest involved in raising SPACs for a de-SPAC transaction involving their own portfolio companies. 

With some studies indicating that APAC accounts for 25% of the global total of PE and VC dry powder, the opportunity to launch a SPAC, which is largely funded by others, generates an outsized return on a de-SPAC transaction and obtains a U.S. listing for an otherwise illiquid portfolio company is a significant market opportunity.

VC perspective in SE Asia:

For VC investors, secondary markets are flush with opportunistic family-office buyers, desperately seeking exposure to SE Asia’s largest tech companies.  A 5-10% discount to the last round price is not an uncommon ask in these transactions.  In this context, a de-SPAC transaction can prove to be an important source of validation for investee company valuations, almost to the extent that VC investors may start to overlook the up to 20 per cent dilution resulting from SPAC sponsors’ “promote”.

Yet there is a second and larger tier of VC company, which may have managed to survive the region’s fabled “Series B” crunch, but where there is no prospect of an exit.  This has been prime hunting ground for strategic acquisitions, especially in hot sectors such as the FinTech space and data economy.  Here, a de-SPAC arguably ticks a lot of boxes and is a much more realistic-sized transaction to achieve, and SPACs could potentially precipitate a wave of regional consolidation in otherwise fragmented industry sectors in SE Asia. 

As the once-elusive public listing for SE Asia’s growth companies becomes attainable, U.S. SPACs offer a winning combination for investors looking to sell, investors looking to leverage growth through an IPO, new investors from outside of the region and target companies looking to access capital rich U.S. public markets.  Whether this promise will materialise in the months and years ahead remains to be seen, with market actors and their advisors potentially needing to take a more measured approach in the way the de-SPAC is constructed in order to unlock value in the region in a sustainable way.   

 

 

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We explore the key issues being considered by clients looking to unlock investment opportunities in the People’s Republic of China.

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