A SPAC is a popular way to list a company
A SPAC has some individual market characteristics
It is essential to evaluate the founding team and the target sector before investing in a SPAC
Understanding a SPAC
A SPAC has been quite phenomenal recently. In 2020, SPACs in the US stock market raised more than US$80 billion, surpassing traditional IPOs for the first time. ( Source: Dealogic)
But what is a SPAC? It is an acronym for Special Purpose Acquisition Company. It has been a popular way to list a company on a stock exchange in the U.S. in recent years. In September 2021, SGX launched a SPAC listing framework, becoming the second exchange in the world that supports SPAC listings. In addition, SPACs will also be allowed to list in Hong Kong from January 1, 2022.
SPACs work in this way: Firstly, sponsors establish a SPAC, which is a shell company. Then the company raises capital through an initial public offering (IPO), but without any actual business or assets. After that, the SPAC searches for and acquires another company of interest, known as a target company, but the acquisition needs to be approved by more than half of its shareholders and independent directors. Finally, the target company can be helped to achieve a rapid listing by merging with the SPAC, making use of the cash raised earlier.
If the SPAC cannot successfully merge a target company within the specified time frame (usually two years), the SPAC will be liquidated, and the money raised will also be directly returned to the investors.
Features of SPACs
Firstly, from the sponsor or management team's perspective, a SPAC offers the opportunity for potential permanent capital for them to fund large acquisitions. Sponsors usually retain approximately 20% of the SPAC's shares post-IPO.
Secondly, for the target company, going public through a merger with the SPAC shell company can greatly increase the chance of getting listed, shorten the IPO time, and use funds raised by the SPAC.
Thirdly, market characteristics. The issue price for SPACs on the US stock market is generally US$10, and it's S$5 in Singapore. A SPAC IPO offers investors a unit of securities that includes one share of common stock and a fraction of a warrant (generally 1/2 or 1/3 of a warrant). Warrants resemble forward call options, which are contracts giving holders the right to buy a certain number of shares of common stock at a fixed price before a predetermined date. Shares of common stock and warrants can be traded in combination or separately.
When the SPAC is said to acquire an attractive operating company, the stock price may rise. But the quality of the target company cannot be guaranteed, and the sponsors may make decisions that do not benefit investors.
Fourthly, redeemable. If investors disagree with the merger decision approved by the general meeting of shareholders, they can choose to redeem their shares at the issue price. In addition, if the merger cannot be completed within the specified time, funds raised initially will be liquidated. Although investors can get their funds back, they will suffer losses as there’s the time value of money during the investment period.
How to choose a SPAC?
Firstly, take note of the sponsors and the management team. The success of the SPAC largely depends on the reputation and track record of its founders and the experience of the management. It is easier for a good team to find a high-quality target company.
Second, consider the target sector. SPACs generally look for target companies within specific industries. Investors can choose SPACs in the industry they are optimistic about.