PALO ALTO, U.S. — Grab Holdings, Southeast Asia’s highest-valued startup, said last month that it will go public in the U.S. by merging with a so-called special purpose acquisition company, or SPAC, the world’s largest blank-check merger to date.
Grab’s deal with Altimeter Growth values the “superapp” at almost $40 billion and shows how SPACs are a Wall Street favorite now also attracting interest in Asia.
This year more SPACs are expected to provide more high-growth Asian tech firms with a means of entry into the U.S. market that differs from a traditional initial public offering, or IPO.
But what is so special about a SPAC? Here are five things to know.
What is a SPAC?
SPACs raise funds in the public market purely as shell corporations. Their purpose is to acquire and merge with an operating company afterward. In other words, investors buy shares in SPACs without knowing until later which business they will ultimately be investing in. It is the SPAC that carries out the IPO.
After this, the people behind the SPACs, known as sponsors, need to find a target company to acquire. The target is then merged with the shell corporation, allowing the target company (such as Grab) to become a publicly listed company.
The number of SPACs is rising quickly. There were 248 SPACs launched in 2020, raising a total of $83 billion, up from 59 SPACs that raised $13.6 billion year earlier, according to analytics specialist SPACInsider.
The momentum shows no sign of slowing. Last year’s record-breaking volume has already been exceeded: More than 300 SPACs have been launched, with over $100 billion raised as of April.
Why are we hearing more about SPACs now?
SPACs have been around for over 30 years, but have only recently become a more mainstream IPO option.
Before 2020, “a SPAC seemed to be a less desirable way to go public,” said Ruomu Li, a partner at Morrison & Foerster, which specializes in cross-border mergers and acquisitions. They were often associated with distressed companies, or those struggling to conclude an IPO.
COVID-19 helped to change that perception. The pandemic fueled uncertainty and made it difficult for companies and investors to consider the longer, traditional IPO route.
“The pandemic kind of closed down the traditional IPO window for companies. … People weren’t sure if they were going to be able to raise the amount they wanted,” said Cameron Stanfill, a venture analyst at PitchBook, a private capital markets research firm.
For high-growth tech companies, SPACs offer a chance to move more quickly amid intense competition. A traditional IPO in the U.S. often takes at least six months to a year of preparation, to allow for regulatory scrutiny and test investors’ appetite.
Merging with a SPAC is quicker. After SPAC shareholders approve an acquisition, it normally only takes three to four months to complete the public listing, an attractive option for companies needing to raise capital quickly. SPACs also give more certainty about how much capital a company can raise, given that the blank-check company already has the money in place.
“The rise of SPACs is largely driven by the fact that the hurdle has been too high for going public in the regular way,” said David Chao, co-founder of early-stage venture capital firm DCM, which invests across the U.S. and Asia.
Why is Asia interested in SPACs?
As Grab shows, emerging tech companies in Asia have strong demand for capital to fuel growth and keep up with competitors. Merging with SPACs is an easy way to access the well-funded U.S. market.
Grab’s archrival, Indonesia’s Gojek, is reportedly preparing to merge with e-commerce company Tokopedia before going public via the SPAC route.
By April 23, seven companies headquartered in Asia have gone public in the U.S. via a SPAC since 2020. Eight more in the region have announced plans for an IPO via a SPAC, according to data compiled by international law firm Morrison & Foerster.
Faraday Future, founded by Chinese billionaire Jia Yueting, has announced it will go public on the Nasdaq stock exchange through a merger with a SPAC in a deal valuing the combined entity at $3.4 billion. The maker of electric vehicles has been struggling to increase production of its first vehicle, the FF91.
Plus, a self-driving truck developer based in both China and U.S. is also considering going public via SPAC. “We’re open to exploring all options. Generally, we see that the investment environment now is very favorable to mobility companies, especially for companies like ours that have a commercial product, customers, and a strong growth plan,” David Liu, CEO and Co-Founder of Plus, told Nikkei Asia.
As of April 27, a total of 14 Asia-headquartered SPACs have raised $2.8 billion, already beating the $2 billion record in 2020 and a significant jump from the $390 million raised in 2019, according to data from PitchBook.
What are the risks?
U.S. listing rules require SPACs to acquire and merge with an operating company within two years, or they may have to dissolve and return the proceeds to shareholders. That means the clock is ticking for nearly 430 U.S.-listed SPACs that are now seeking acquisition targets.
Not all of them will find a qualified company before the clock runs out. Meanwhile, companies that are in demand as suitable SPAC merger targets have leverage to negotiate for better terms, which puts SPAC investors at risk of overpaying.
“I think the stock performance of some of those businesses after the [SPAC] combination can be a little bit lackluster, given that maybe they did do kind of a poor deal, or maybe overpaid,” said Stanfill at PitchBook.
One feature of SPAC accounting is that companies are allowed to include future revenue projections, which could be misleading for less experienced investors.
While SPACs allow public market investors early access to invest in high-growth startups that are usually reserved for venture capitalists, it also exposes them to higher risks, said Stanfill.
What are regulators doing?
U.S. regulators have stepped in to cool down the white-hot SPAC market. John Coates, acting director of corporate finance at the U.S. Securities and Exchange Commission, said in April that “some — but far from all — practitioners and commentators have claimed that an advantage of SPACs over traditional IPOs is lesser securities-law liability exposure for targets and the public company itself,” a characterization that Coates called “overstated at best, and potentially seriously misleading at worst.”
In the past month, the SEC has issued several warnings to public investors and released new guidelines to push for more disclosures and transparency in SPAC transactions.
In Asia, SPACs are much less common. Most Asian stock exchanges do not allow listings of blank-check companies. Compared with the U.S. they have more disclosure requirements and longer vetting processes by listing committees.
However, regulators in the region have been exploring ways to capture the SPAC wave. The Singapore Exchange is seeking feedback on a new regulatory framework for SPACs that it hopes to finalize by midyear, while in Japan, a government panel suggested in March that authorities consider whether to allow SPACs as a way of channeling capital to startups.
