SPAC Skyrockets: Southeast Asian Unicorns Reluctant to Look at Traditional IPOs

As China's digital economy matures, technology companies have had steady sources of initial public offerings (IPOs) on US exchanges and domestic exchanges in Hong Kong, Shanghai and Shenzhen.

In Southeast Asia, Sea Group's 2017 IPO on the New York Stock Exchange set an example for technology companies in the region who aspire to go public, including high-value unicorns such as Indonesian travel app Traveloka, e-commerce platform Bukalapak, and Tokopedia, along with Singapore-based digital services giant Grab.

However, by the time these companies matured and considered making a public offering, conventional IPOs had lost ground. Now, the acquisition of a special purpose company, or SPAC, is the solution. Also known as a blank check company, SPAC is a shell company that raises funds through public offerings to acquire unspecified companies. This type of company has no independent business model other than these financial transactions.

With this character in mind, the chairman of the US Securities and Exchange Commission, Jay Clayton, advised investors to gauge the motivation of SPAC sponsors. It is often the leading private equity (PE) firm that uses SPAC to bypass investment banks and their issuance fees to bring private companies to the public market.

The conventional IPO process is complex, expensive, and time-consuming. For tech startups in Asia, SPAC is a cheaper and more efficient fundraising option.

SPAC has gained huge momentum in the US in 2020. More than 200 SPAC raised approximately USD 70 billion, providing a reference on the Asian market for 2021.

Unicorns in Southeast Asia

Tokopedia is one of the target Bridgetown Holdings, backed by Peter Thiel and Richard Li, for the merger of blank checks in December 2020. If the deal continues, this could be a regional trendsetter.

“To illustrate, SPAC has been around for decades. They were very popular in the mid to late nineties, but became outdated when investors lost money,” Joel Shen, a corporate attorney at global law firm Withers, told KrASIA. He believes that the resurgence of SPAC's popularity can be attributed to low interest rates, abundant liquidity in the market due to the stimulus from the US central bank system, and an increase in the number of acquisition targets, especially in technology.

SoftBank, one of Tokopedia's investors, filed for an IPO of SPAC in December with the aim of raising USD 525 million. SoftBank has invested in more than 100 growth-stage companies worldwide, and some of these may be attractive targets for its SPAC, SVF Investment Corp.

With SoftBank—a giant in tech investing—entering the SPAC space, its portfolio companies are like Grab can find a quick route to the New York stock symbol. "SPACs allow their targets to list without first going through the costly and time-consuming IPO process, and potentially offer target shareholders, including institutional investors such as VCs, a quicker way out than a traditional IPO," said Shen.

If Indonesian unicorns can go through this model, then this will be a good barometer to answer the question of whether Southeast Asian companies with a local market focus will be accepted on foreign exchanges.

However, SPAC has its drawbacks. Because they are a blank check company, investors are betting on SPAC sponsorship rather than business quality, Shen said.

In addition, a SPAC merger must take place within a certain timeframe — usually between 18 and 24 months. If no acquisitions are made before the end of the term, the sponsor may consider asset quality and bargaining power.

While Chinese capital markets in Shanghai and Shenzhen offer alternative routes to domestic tech companies for significant fundraising, Southeast Asian tech startups don't have the same options at home, pushing them toward foreign-exchange SPAC mergers.

According to an analyst familiar with the subject, the SPAC boom in 2020 marked the beginning of a new era in which top institutional investors, usually leading private PE firms, became a more instrumental market force in IPO pricing. “Traditionally, IPO prices are set by investment bankers who establish the books through a series of closed and successive talks with PE companies. However, with SPAC in hand, PE managers can abandon this banker role and reach a direct agreement with asset owners,” said the analyst.

-This article was first released by KrASIA. Re-released in Indonesian as part of the collaboration with DailySocial