The new listing framework for special purpose acquisition companies (spacs) was introduced by the Singapore Exchange (SGX) almost precisely a year ago, igniting expectations that the local bourse will soon benefit from a fresh round of trading interest with the impending listings of “unicorns” — fast-growing, high-tech entities (but not necessarily profitable, yet) — under this new listing framework.

Three spacs, Vertex Technology, Pegasus Asia and Novo Tellus Alpha, were listed quickly. Yet, since then, the fervour has cooled considerably amid an overall dampening of global IPO activity. Instead of leading a mass charge of spac listings eight months on, the first three spacs have only one another for quiet company.

Tracing their roots to the US, these new investment structures were hot with investors. The excitement of investing in a new-age company was dizzying. Flush with easy money looking for new places to park, investors could not get enough of these fast-growing companies. The so-called “de-spac” processes, where the listed entities acquire a “real business”, were widely-anticipated events.

There was indeed a string of successful de-spacs. They include ChargePoint Holdings on the New York Stock Exchange and Lucid Group on Nasdaq, which made decent gains over their respective IPO prices. As it is, these two companies are in the minority. CNBC’s proprietary SPAC Post Deal Index, which tracks spacs that have completed their mergers, has fallen nearly 50% this year. The losses more than doubled the S&P 500’s 2022 decline over the same period (see Chart 1).

Singapore-based Grab Holdings contributed to this decline. When Altimer Growth Corp acquired the ride-hailing giant late last December for US$40 billion ($56.6 billion), it was the largest de-spac deal. As it turns out, this bragging right could not stem the steady slide of Grab’s share price. From the opening “pop” of US$13.06, Grab’s share price went to as low as US$2.33 on June 17. It closed at US$2.81 on Sept 28, representing a 78.5% decline from its IPO price.

Grab raised some US$4 billion in cash from the listing, buttressing its war chest just before overall market sentiment soured — and not only with regard to supposedly high-growth yet loss-making entities like itself.

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Stephen Chen, a private investor, is not surprised at the market’s lack of attention and the downward trend of spacs. “This year has been tough for the markets. Interest rates are rising, and spacs are not seen as a good investment product now, with its high risks and lower returns compared to some of the less risky investment products out there.” Chen was one of the several stakeholders who responded to SGX when the bourse sought consultation on spacs.

With higher rates offered for an even shorter-term, low-risk investments such as Singapore government-issued bonds, investors are less motivated to flock to products such as spacs. What with the current spac sentiment, the long-term game coupled with the uncertainty in the market makes spacs a less attractive investment product today.

In spac sponsor’s hands

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Investing in spacs is essentially a game of waiting and trusting. Investors who go in during this phase do so without knowing where their investments will eventually go. They have a rough idea of the industries the spac sponsors have identified. By and large, the investments are entirely in the spac sponsor’s hands.

The way spacs are created means that the companies acquired by the spacs undergo a less strict listing requirement than companies trying to list via the traditional route. Often, they are not profitable, albeit they tell a convincing story about their prospects to convince investors to come in and help fund them to the next level.

Under SGX’s spacs framework, they are to have a market capitalisation of at least $150 million and have up to two years to acquire. If not, there is the option to continue the search for another 12 months. So, what happens in the meantime as the spacs try and de-spac? Nothing.

According to the SGX framework, the spacs are not allowed to announce any trigger activity until they are ready to propose or announce a transaction. And indeed, the three spacs now listed on SGX have been keeping quiet, declining to provide any updates when contacted by The Edge Singapore in the more than six months since they were listed.

As of Sept 28, shares in all three SGX-listed spacs, all offered at $5, are trading below that level. Shares in Vertex Technology, Pegasus Asia and Novo Tellus Alpha are trading at $4.62, $4.62 and $4.59, respectively.

However, Chen sees this as somewhat of a good thing. “If I were an investor, I would be worried if the company de-spacs in such a short time. That would mean they already had a target in mind before or upon listing.”

Echoing the same sentiments, Stefanie Yuen-Thio, joint managing partner at TSMP Law Corp, says that it is not unusual for spacs to take the full 24 months to de-spac.

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Lest anyone has been living under a rock, the US and most major markets have been “whacked big time”, impacting market sentiment and valuation expectations. She believes that the end of 2023 (about 24 months after the listing of the three spacs) is when “things will get real”.

Yuen-Thio believes that the subdued market sentiment is because of the ongoing waiting game. Potential players are standing pat to see when the first three spacs de-spac, and how they will do, before deciding their course of action while considering regulatory requirements and valuations.

“More generally though, the recent drubbing in the US stock markets has lowered valuations of new technology and companies in more innovative sectors. I think everyone is waiting for things to settle,” she adds.

Mohamed Nasser Ismail, global head of equity capital markets at SGX Group, is not overly concerned over the number of spacs here. “Spacs fill a gap and will continue to be a viable option for companies wanting to go public. Our focus remains on the high quality of sponsors and business combinations to make them attractive to investors,” he says.

Following the listing of the three spacs on SGX, the bourse has continued to see “healthy interest” from investors, which was significant for “marking a healthy debut of spac IPOs in Singapore”, he says. Since then, SGX has continued to receive strong interest from potential sponsors from across the region to explore spac listings.

“The situation today is not that there is too much spac money chasing after opportunities. When market conditions improve, we will see spac listings returning to the market, and successful de-spacs will create a virtuous cycle where each spac will drive more investor interest and demand for future ones,” Mohamed adds.

Listing via spac is an easier and faster way for start-ups to go public. But is this the right way to go public? There is a reason why a strict framework is created by individual exchanges — not just to protect the interest of the exchange, but more importantly, to support shareholders and provide a safe space for investing.

“Our spacs framework was introduced after extensive consultation, taking into consideration what would work for the companies and investors in the region,” says Mohamed.

However, if these start-ups, on their own, cannot meet the listing rules, what makes them as good as or equal to the companies that have been listed through traditional means?

The spacs are typically set up by venture capital firms, all of which are used to investing and looking for high-potential start-ups. But there is a growth journey for these startups to not just learn about the market landscape, but also to be stable on their own.

Often, start-ups are also not profitable. And how long can they remain loss-making? In the previous era, when cheap funding was available, investors were more easily persuaded to stay patient and hand the cash over first. Not so now. If these start-ups are technically not ready for a traditional listing, what is the point or purpose of listing? Are they biting off more than they can chew?

With the lacklustre performance in the spac space, unsurprisingly, a vicious cycle is forming where investors have started to turn away from spac listings. Most recently, plans for four new spacs in the US have been pulled in less than 24 hours by the serial dealmakers at Navigation Capital Partners as the once-frenetic industry goes cold. Navigation will not proceed with efforts to raise US$150 million apiece for Navigation Capital Acquisition VI, VII, VIII and IX.

In this year alone, as of the end of April, at least 56 spacs with ambitions to raise more than US$16 billion globally have been called off (see Chart 2), while 58 spacs have gone public (down from 850 in the two prior years).

On Sept 20, Chamath Palihapitiya, dubbed the “Spac King” for bringing to the market deals such as Virgin Galactic Holdings and SoFi Technologies, announced the shutting down of two existing spacs. As he returned some US$1.6 billion to investors, Chamath, founder and CEO of Social Capital Holdings, reportedly looked at more than 100 companies but could not come to a suitable deal. “It is a very, very precarious moment in the capital markets,” he told The Wall Street Journal.

Chamath’s move comes just two months after a similar decision by US billionaire Bill Ackman of Pershing Square to pull the plug on the US$4 billion Pershing Square Tontine Holdings spac. Ackman blamed the “faster-than-expected economic recovery from the Covid-19 pandemic” for failing to de-spac. He cited other factors, including adverse market conditions and intense competition from traditional IPOs.

This was perhaps a best-case scenario, whereby the shareholders were returned their initial investment plus interest instead of pushing through with a de-spac and then suffering from losses when the market makes its view loud and clear.

Meanwhile, bigger banks that handled previous spac offerings too have abandoned the industry amid uncertainty regarding proposals from the US Securities and Exchange Commission, and shares of companies that complete their mergers fizzle.

As the spac spark fizzles out, are investors still willing to take the risk, especially if there has been a long reputation for spacs to drop after the merger?

Yuen-Thio points out that Singapore’s challenge soon is to complete a few successful and high-profile listings to establish that Singapore is a substantial market. She hopes that the quality sponsors of the current three spacs could help to achieve that.

Despite the overall negative sentiment, Mohamed emphasises that Singapore still has a vibrant startup and high-growth tech ecosystem. “The conducive environment will encourage more engagement, and we are optimistic that some of these discussions will yield positive outcomes,” he says.

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Amid global IPO slump, spacs stand pat while investors wait and trust

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