Startups in sectors such as space trucking (Momentus), rocket launching (Rocket Lab), helicopter taxis (Archer Aviation), and electric vehicles (Lucid Motors, Xos, Nikola) are among the latest to merge with special purpose acquisition companies or SPACs – the asset class that has taken Wall Street by storm.
According to data available with SPACInsider, nearly 190 SPACs have been launched in the US stock markets so far this year, raising over $59 billion. That’s already about 75% of the total number of SPACs that raised capital in the whole of 2020.
The SPAC mania is increasingly gaining steam in Asia, although the business models of the targets for acquisition here seem less outrageous by comparison. Chief among them are unicorns in Indonesia and Singapore – some have reportedly already lined up bankers for their public market debuts.
Indeed, the targets of SPACs and their subsequent merger process are the key metrics to watch out for as they play a critical role in determining the success of the fundraising vehicle, according to panellists at DealStreetAsia’s first webinar of the year, ‘SPAC to de-SPAC: What’s next for the hottest fundraising vehicle.’
The panel comprised Ravi Thakran, chairman and CEO at Aspirational Consumer Lifestyle Corp; Jun Hong Heng, founder and CIO at Crescent Cove Advisors, and Helen Wong, partner at Qiming Venture Partners. The discussion was moderated by Kristie Neo, who covers venture capital at DealStreetAsia.
The session also addressed key questions on people’s mind today – whether the market for SPACs is becoming overcrowded, and if the fundraising vehicles served their sponsors better than companies they are taking to market, and the prospects of investors who come in later.
Watch the video or read on for a transcript of the webinar, edited for clarity and brevity.
KN: We have seen everyone from Hollywood celebrities to sports stars and VCs and PE funds launch SPACs. To start with Jun Hong, how much of your decision to launch a SPAC was driven by FOMO (the fear of missing out)?
Jun Hong Heng (JH): Crescent Cove is a TMT (technology, media and telecommunications) investment firm based in San Francisco, founded in 2016, with a strong team and investing track record. I have been familiar with SPACs since 2005 and view it as a flexible financing vehicle for middle-market companies, especially within the TMT space.
In December 2020, one of our portfolio companies Luminar Technologies completed its SPAC, and we were intimately involved in that combination.
Apart from our own experience, there has been a greater acceptance of SPACs as a financing vehicle in the past 12 months. It could ultimately develop a larger pool of high quality companies. It made us believe that the COVA team at Crescent Cove can help make a difference and led to our decision to launch a SPAC.
KN: But do you believe there’s an element of FOMO, considering we have seen so many SPACs recently?
JH: Having more companies that are open to being acquired or listed by a SPAC has created a rush for more sponsors to come up. But then, if you don’t have high quality companies that want to be acquired by a SPAC, you wouldn’t have as many sponsors.
KN: Can we have your perspectives on this, Helen?
Helen Wong (HW): More companies, especially in the technology space, appear to be using SPACs to go public as an alternative to an IPO. When Patrick Grove at Catcha approached me to be an advisor, I thought it was an interesting vehicle to learn about. Given Patrick’s background and that of the team at Catcha, I felt that they could do a good job to help Southeast Asian companies go public.
KN: What does a crowded market mean for the Southeast Asian SPACs?
HW: The number of SPACs is not the most important metric to watch. The important metric to track is actually de-SPACing. How many of these will be successful mergers or IPOs for tech companies?
The rise is really because of the free flow of money. Negative interest rates and a very low yield means that a lot of money is looking for good assets. A lot of it will be parked into SPACs, considering that they have low downside, and high potential upside returns.
KN: When you talk about the de-SPAC process, the historic track record shows that a substantial percentage have liquidated, unable to find targets. Only a few manage to get the top-notch targets, which everybody reads about in the headlines.
Ravi Thakran (RT): It is natural to focus on the number of issuances which have been unprecedented. It cannot continue and there will be some correction. There will be many one-and-done guys: people who either raise but never find a target, or find their first and decide “that’s it”.
But at the same time, there will be many franchises who will become very high quality. The key issue is the quality of the sponsor. This is ratified by feedback from investors as well as CEOs and founders whom we met. McKinsey did a study which came out in September last year, which says that there is a single variable that stands out between good and not-so-good SPACs – the quality of the sponsor group and the operators’ edge.
SPACs that include people who know the business well and can add value, do 40% better than normal.
When we are going for a SPAC target, there has to be a brand that resonates in a category that has tailwinds, is IPO-ready and has robust growth which can be accelerated further by a partnership with groups like us, besides having strong unit economics or a clear path to profitability.
If these aspects are present, certainly the market will welcome SPACs.
KN: Ravi, you recently acquired Wheels Up. What was the de-SPAC process like, considering you did it pretty quickly?
RT: Our play was very focused on aspirational consumption, as is reflected in our name. We were looking at options in fitness, wellness, hospitality and even spirits.
Wheels Up ticked all the boxes: a very differentiated business in private aviation. There has been a filter in the past, which didn’t allow people to use private aviation. According to a study, 91% of people in America who can afford to use private jets have never flown in them. On the other hand, private jets are sitting idle 95% of the time!
So, here is a new generation tech platform, which is now connecting the two. Millions of customers on one side and tens of thousands of aircraft and the opportunity to create an Uber of the skies. We felt it was a perfect asset to go after. We could add a lot of value because customers of private aviation have a 100% overlap with customers in luxury goods where we have very deep experience.
KN: Many targets are companies that have been around for a long time, built by founders and grown by leadership teams. What value does a sponsor bring to these companies?
RT: There are two clear aspects. The first is our team: my colleague Mark Bedingham built Moet Hennessy for the last 20 years. Another colleague Lisa Myers invested for 20 years in public markets. If you have a brand that is really doing well, but you want to make it truly world-class, this is what we have done. For instance, taking Dior from being a European to a global brand.
The second very important piece for some of these businesses is serving as a bridge to Asia. Going forward, 60%-plus of worldwide GDP growth will come from Asia. You may be doing well in America or Europe. But if you have not penetrated the highest growth market in the world today or have not built the right bridge, you will not be a truly global brand.
Having done that for a long time, we can provide that bridge.
KN: But don’t a lot of venture capitalists or even PE funds say that they can offer these exact same things – access to new markets and networks?
JH: The partnership really gives the management team trying to go public a chance to choose a sponsor to work with. For team COVA, our board of directors – Pandu (Sjahrir), Alvin (Sariaatmadja) and our advisor Austin Russell – are critical to how we view successful transactions. They can help a company grow not only operationally, but also because of their experience with capital markets.
RT: There are two aspects to the question – one is private markets and VC/PE funds versus public markets. And then within public markets, SPAC versus IPO. SPACs are so uniquely placed that they combine the two: all the advantages of going public, but at the same time, being able to do a transaction as private M&A. You can have upfront value discovery, the opportunity to negotiate confidentially and select your partners. And finally, rapid execution.
KN: There’s a lot of criticism around the role that SPAC sponsors play. The first is that sponsors take up substantial amount of equity, leading to a lot of founder dilution compared to an IPO. How much value are they really bringing to the table, if the founders are disincentivized?
RT: First of all, I disagree. In the past, the SPACs had a reputation of being empty or dirty shells, a way to a backdoor listing for poor businesses. To some extent, perhaps that perception was correct. But a lot has changed ever since. For instance, the quality of sponsors has improved quite a lot.
A phenomenal number of companies should potentially be public but haven’t gained access. In SPACs, you could use projections, which you can’t do in an IPO. That is great particularly for tech-enabled businesses who can show a clear path to profitability, while not being profitable today.
I also disagree that SPAC sponsors are making a lot of money, and that it is perhaps a lopsided arrangement. Eventually, a sponsor will get a low to single-digit percentage of the asset. And if you are a value-added player who can clearly bring value, it gets paid up within few minutes of the transaction.
But even if you consider [the] total cost of [a] transaction, including advisor fees, it is still between 4% to 5%, which is pretty much in the same range as IPO, while having all the other advantages that I have outlined.
I genuinely believe that criticism is justified only if you are not a focused SPAC sponsor and do not bring a strong value add.
Successful franchises like Jun Hong’s bring phenomenal value to the TMT space. We understand the consumer-branded space, so we bring value there. Those who are just trying to get on the bandwagon, will most likely fall off.
KN: The other criticism is that SPAC sponsors tend to take their money and then leave their companies after merger. Do you have a post-merger commitment?
JH: It’s not widespread, but it does happen. At COVA, we are long-term investors and knowledgeable partners. It’s not purely transactional. That’s part of our business combination. The right fit between sponsor and company is highly critical in order to have a successful partnership.
KN: Do you have a timeframe for how long you see yourself sticking around, post-merger?
JH: In the Luminar transaction, we have spent five years as shareholders in the company. We told the investors that the business combination is just the start. For any businesses that we’re targeting, it’s hard to put a number but we are there for the long term.
RT: This is exactly our approach as well. You need to get the company ready first, before you build the Asia bridge. You can’t do it in just one year.
Sponsors who go with a very short-term approach, would perhaps bring a wrong name to this pristine asset class, which I believe SPACs have become.
A lot of credit goes to Chamath Palihapitiya (of Social Capital). He has done seven SPACs and four combinations. He reinvented this as a path for high-growth tech businesses to go public.
What advice would you give to a founder who may be on the receiving end of all these criticisms about SPACs?
HW: There are pros and cons of different vehicles, which I hope companies are aware of. I tell them, “You can consider IPO – You get time to do roadshows, educate the market and get analyst coverage. But at the same time, why don’t you consider SPACs? There are so many out there, that you can probably negotiate good terms. Maybe you can lower the percentage that the sponsor gets.”
The advantages of SPACs are speed, and like Ravi mentioned, you can make projections and negotiate the price. Unlike many recent IPOs where a lot of money was left on the table, you might have more certainty about valuation.
The disadvantage of SPACs of course, is that there may be more dilution. But I remind companies that a lot of founders underestimate what it takes to go public. Are you ready to meet investors and shareholders? Can you meet quarterly projections? Maybe you require a whole team of people to help you with becoming a public company. A lot of founders are not geared towards this change. They are still in the founder stage: running so hard with operations, that are quite happy to have somebody help them navigate this process.
And maybe, after the SPAC or IPO process, they do not need that team or person anymore. It really depends on the company. But having an experienced mentor or coach could really help, even post IPO.
RT: As somebody said, “When the wind is blowing very well, even a turkey can fly. You can tell the eagles from the turkeys when wind is not blowing.” The eagle and turkey situation here is the people with real operating edge and others who lack it entirely.
I genuinely believe that platforms like Jun Hong’s will do multiple transactions with very successful outcomes. As for those trying to get on the bandwagon; the falling out has happened in both private and general public markets. They will be some crappy deals but then there are also some crappy IPOs.
KN: To shift tracks, Jun, you’re based in Silicon Valley. Why target Southeast Asian deals when you’ve got plenty of top-quality deals in your backyard?
We do have the ability to look at the US, but our focus is Southeast Asia. It really comes down to having the right team and confidence to execute globally. We’re excited to have Crescent co-founded together with Pandu, Alvin and Austin. They all bring different technology, investing and operational skill sets, and also critical local and regional experience.
KN: But why Southeast Asia and not other markets like China and India?
JH: It has a lot to do with our directors. I have a long-term relationship and have known Pandu for many years. We have confidence in working together and having a successful business combination. We are very focused on areas where we have an edge and ability to execute.
KN: Helen, we haven’t seen as much of a SPAC buzz in China. Is there a reason why Southeast Asia seems to be jumping ahead of the curve, compared to markets like India and China?
HW: The wave of SPACs really came from the US and looking for targets globally is now the trend. Southeast Asia is probably a little easier for US investors to target. China has been a closed ecosystem for a very long time. It also has phenomenal IPO markets, locally. I always tell Chinese companies how fortunate they are, because they can choose between Asian markets, the Hong Kong Stock Exchange, NASDAQ or the NYSE. There were 400 companies that went public last year in China, if I’m not mistaken. There hasn’t been a need to look for alternative vehicles.
In Southeast Asia, there haven’t been as many IPOs. Sponsors could help the process. There haven’t been so many sponsors coming up from China. We are seeing new sponsors like Primavera and Hony coming out – as more of these come forward, maybe you will see some of them selecting SPACs as well.
KN: Is it a reputational issue? How do Chinese companies perceive SPACs?
RT: I would disagree with that. It is simply a regulatory issue. The only other market, besides the US that has taken to SPACs well is Amsterdam. Even London which is a robust exchange, or Tokyo and others have not taken them on.
I’m very excited that SGX is considering this alternative. Many Asian companies could find a great path, and tell the same story that US companies have been able to tell in that market. But governments and exchanges have to decide whether they allow the use of future projections. That’s the single variable.
Singapore had previously considered it, and at that time passed on it. I hope this time they consider it. In China, of course, once you get listed, the valuations are incredible – far better than you would get in Hong Kong or elsewhere. But the path to listing is onerous. The process with the CSRC (China Securities Regulatory Commission) is long and very intense. If the regulatory environment changes, Asia could take off as a SPAC market.
KN: In Asia, there have been some markets that have allowed SPACs – Malaysia as well as South Korea. So, does it go back to a reputational issue?
HG: Most Southeast Asian companies just don’t have the scale to go public. You have six unicorns in the region and they would be the main targets of SPACs. They are probably at a stage where they can consider an IPO or SPAC.
In China, you have a lot more companies of scale that can go public on their own. It is also about the maturity of the infrastructure when it comes to corporate governance and being a public company – service providers like audit teams, legal firms and bankers.
When I talk to companies in China about SPACs, the first question is, “Why do I want to be diluted with a sponsor?” The second is there haven’t been that many great SPACs. Youwork – the WeWork of China – is going public. I like the founder of YouWork, but I think, the story is not as strong because of the WeWork debacle. They believe SPAC could be a better option than an IPO. But that’s not a great SPAC to open the door for Chinese companies. It would take a successful story, and then, the market would get more educated about SPACs.
KN: How does the deal quality compare in Southeast Asia versus what you’ve seen in China, when it comes to being exit-ready or IPO-ready. Are we there yet?
HW: It’s at a much more nascent stage. Southeast Asia only became exciting maybe five years ago in terms of companies that were able to benefit from growth and the internet. Some of them are reaching scale in terms of their ability to be a public company and offer quality projections.
There is a lot of infrastructure that needs to be built. This year will be very exciting and, in the future, you will see that ecosystem grow.
JH: What’s critical for regulators is to ensure that there’s consistency across vehicles and that there is transparency in governance. Post that, it’s really a free market. A good sponsor can probably bring a company on the backend. On the frontend, whatever the regulators believe, if they are going to decide that they will do it, is pretty straightforward.
It’s great that SGX is thinking about it, because it would help with liquidity for smaller companies.
KN: How likely is the SGX to allow SPACs to happen?
RT: It’s very exciting that SGX is considering this, and we would love to participate, if it happens. But there are some things to keep in mind. Today, the US and Canada corridor has a very strong ecosystem of hedge funds and mutual funds. This is very important since hedge funds typically invest in a SPAC and eventually mutual funds and other long-term plays take over.
In Asia, it will take time to get started, stay on course and then obtain that level of institutional help and support. If we do that – and it can be done – I genuinely believe there are at least 1,000 companies here which could and should go public.
The second point is about dilution, which has been raised a few times. It’s important to understand the mathematics. In the US market today, if you go below $100 million or $150 million, it becomes a challenge because anything below a billion-dollar valuation becomes microcap. There is very little attention paid even in NASDAQ.
On the other hand, if you take $250 million to $300 million, then people believe it could lead to too much dilution. It will not, if we are looking at five to eight times the size of your SPAC. At 8 times, you get 20% of your SPAC size as a promote, and then come down to only 2% of the asset. I believe that is not too much of a dilution. If you are a value-added player, it is paid out in no time. So right sizing of the SPAC is important if you want to play the US market, and then focus on the value add.
KN: Ravi, most SPACs are focused on technology, but what about non-tech companies?
RT: In our first round, we had shortlisted 12 companies, 10 of which were non technology. In our second SPAC that we’ve just launched, it is very likely that we will bring a consumer brand from the traditional segment, but with a great tailwind behind it.
It would be as good as a technology business. Wheels Up was a good combination of consumer brand and technology. But our second SPAC will quite likely bring a pure consumer asset to the market.
KN: We now move to audience questions: Since we talked about Wheels Up, how much of the promotes, if any, did you need to forfeit on that deal?
RT: The quality of a good SPAC can be gauged by the discount that you have to give. We gave zero. 100% of our existing shareholders in Wheels Up rolled in and did not sell out. And 100% of the people who came into Aspirational have indicated that they are staying on, as of now.
Finally, I’d like to talk about the quality of our PIPE (private investment in public equity) investors. We not only put up $240 million from our SPAC, we raised an additional $550 million of PIPE investments. The investors included Fidelity, Templeton, T Rowe Price – big names and long players. I believe we have scored 100% on all parameters.
If you have the right play, you get this treatment. If you do not have it, you either end up paying too much valuation and that’s the only way you can attract somebody or end up giving discounts, which is not the right thing.
KN: How do you see appetite from PIPE investors for Southeast Asian assets?
RT: The issue in Southeast Asia is the size of assets. We are a bit undersized and under-scaled. I’m happy that Jun Hong and others are looking at Indonesia – that market has some good scaled assets like Singapore. The challenge is market awareness.
Do we have billion or multiple of a billion-dollar valuation assets in Southeast Asia? There may be a dozen which we can easily think of. That is the constraint.
HW: There’s no shortage of big funds in Singapore. The Wellingtons of the world are here and the Singapore government has been encouraging fund managers to move. Another trend that we see is high net worth family offices moving to Singapore. Sergey Brin just announced he is opening his family office. There should not be a shortage of investors as long as there are good targets, as my fellow panellists have pointed out.
KN: The next question is for Jun – what lessons can we learn from the US that can be applied to the Southeast Asian markets?
JH: The US is far larger. We have not seen a transaction yet in Southeast Asia. The way we approach the target has to be slightly different. Other than just capital, there’s also local experience and geographic expertise. The much bigger difference with the US is that market is really fast and a free-for-all. Asia and Southeast Asia take a little longer for the target company to actually get comfortable.
KN: What is the view for India when it comes to SPACs?
RT: India as of now, has a fairly robust capital market for IPOs and a lot of companies go public in India at a very young stage.
But there is a clear play for an India-US corridor. In the last 30 years, the China-US corridor was great for manufactured goods. It created multiple trillions of dollars.
In case of IT, there is a great US-India corridor – companies which have Indian costs and US revenues. They have built a very robust model in technology or SaaS-based platforms, among others. A lot of those should be good targets for SPACs.
HW: I understand that there have been some regulatory restrictions – you have to get relevant ministry approvals, which is probably why we haven’t seen so many SPACs. But I did see that Grofers might be trying for a SPAC. We may see more of that in the future.
KN: Could you share the prevalence of earnouts structures to align sponsors with an operating company? How flexible is the negotiation?
RT: This part is exactly same – whether in private or public transactions. A good quality management needs to be incentivized in a strong way. One would recommend a solid incentive system, whether through earnouts or ESOPs.
JH: When we completed our transaction for Luminar, we did have another structure there. It is public information – it was about 7.5%. It had different hurdles in regards to the share price to help us assist the management or original shareholders reach those targets. It was a way for us to deal with any perceived dilution on the cost. As Ravi mentioned, it really comes down to negotiation with the sponsor.
KN: Are SPAC sponsors effectively seeking to replace the investment bankers’ IPO fee that companies would pay to get listed?
RT: I don’t think there is any replacing of investment bankers. This is a complete coexistence among all players, an ecosystem where everybody can pitch in and add value. Most SPAC sponsors have worked with Credit Suisse, Citi, JP Morgan or Goldman Sachs. Similarly, when it comes down to eventual PIPE, you typically work with various bankers. Successful build of this asset class would need everybody in the ecosystem to play: be it bankers, hedge funds, mutual funds or stock exchanges.
HW: The sponsors do put capital upfront to cover some of the bank fees. That is at risk if the SPAC doesn’t work and eventually fails. But I don’t think it is a replacement. The sponsors probably lend a lot more credibility to the IPO story.
KN: Is there a valuation sweet spot that companies should consider for the SPAC route?
JH: Being private allows you to not incur the expenses involved in listing. With that cost alone, which has gone up drastically in the past six months to a year, there is a certain barrier on how big the company should be. In the US, the natural barriers are around a billion dollars pre-transaction value. The sweet spot for what we do is between $1 billion and $5 billion. It can be different for different sponsors – we just prefer it to be in that range and want to be highly focused.
RT: Valuation is a question that is sector-specific. Certain sectors are valued on a revenue multiple; others on an EBITDA multiple.
Are there any notable trends that you see in new SPAC issuances?
HW: Electric vehicles are still very hot and more companies in the space are going the SPAC route. There seem to be more celebrities joining, and there are questions raised about how fit they are to really help companies.
KN: How are LPs in Asia, especially Southeast Asia, looking at SPACs in terms of the investment structure?
RT: It depends on what the LPs are backing – venture, private equity or some other play. Particularly with private equity platforms, LPs do not want to defocus. They would expect the PE firm to have a separate, dedicated team for SPACs.
There are a lot of LPs approaching various successful SPAC sponsors to participate in the sponsor group. There is a genuine interest and it could only get wider. The bigger names are already in play. Maybe not in the sponsor group so much, but in the PIPE segment. All the major players would eventually look at PIPE and once a firm gets listed, a lot of them do play the public markets very well.
They are observing SPAC vehicles and seeing which ones are high quality and should be backed, when it comes to public markets.
KN: Do SPACs make more sense for companies that don’t need to be consumer-focused? The IPO route requires a company to have the brand marketed to investors and public community; so can they just leverage a sponsor’s reputation?
RT: To some extent, yes. But only to an extent. Eventually, even for sponsors, the quality of asset, brand and business is very important. Typically, if you are taking an Asian asset to the US, the investor would want to invest in something they know or have heard of, where they are familiar with the category, can feel tailwinds, see the runway and therefore the total addressable market.
If you are able to tell a succinct story about all of the above, that can play. For storytelling, the right sponsor can absolutely help. But listing is just a beginning, not a destination.
JH: The SPAC vehicle is not a magic bullet. You need good assets, great management, and companies that are IPO-ready to actually have a successful transaction. Post that, if you have not figured out your product-market fit, or a clear path to breakeven, the SPAC listing is not the right move.
KN: What would you advise aspiring sponsors who want to raise a SPAC? What are the risk factors?
JH: There is risk capital; the D&O (directors and officers liability) insurance has gone up a lot. You’re looking at a negative carry. Ensure that you have enough financial backing to cover a SPAC’s operating expenses. Post that, make sure the focus is clear. What businesses are you trying to look at? What value add, investing experience and operational background can you bring?
RT: The biggest risk is reputation. Do not underestimate the work required to get a successful combination done. If you are located in Asia, you pretty much have to start living on New York time. All the roadshows happen on US timing and so do PIPE discussions. With public market orientation, and SEC filings and regulatory issues, it is fairly intense.
Secondly, have a dedicated team – do not try to combine it with your PE platform or anything else. And third, make sure that the cost part is not just risk capital. Because sometimes, it takes longer to find the right assets. And then, you may do due diligence and finally drop it. Dive in only when you have complete ability on all these fronts.
KN: Is there any conflict of interest in a PE-sponsored SPAC for its portfolio companies?
HW: If you are actually targeting your own portfolio company, it could be a red flag for the SEC.
It makes more sense to target something that’s not your portfolio company. Given that PE and VCs are in the business of making such investments, and hoping to exit through an IPO, there should be enough targets to go after.
RT: Having gone through a SPAC with a combination, and having had a private equity platform as a backer, it does bring a lot of complexity.
Even if a PE firm is just among the sponsors and not bringing its own asset to market, you still need to give a full declaration. You will have to make additional disclosures and live to those disclosures with full moral responsibility.
Finally, if you end up considering an asset that is in the portfolio, it adds 5X to the complexity. It doesn’t mean that it cannot be done. There are a lot of PEs which have launched a SPAC platform, and will get it done. But it will require a dedicated team, focus and not mixing the two things.
KN: Would the panelists like to speculate the percentage success rate of an actual SPAC combination?
RT: We were lucky to be able to go to market and within four months bring a combination. About 90 plus SPACs got raised from Asia last year. This year already, almost the same number have been raised.
When it comes to bringing a combination, the number is just about a dozen-plus. The key issue is de-SPACing.
HW: I’m quite confident that the Catcha SPAC will succeed; otherwise, I wouldn’t be the advisor. There is an increasing interest in Southeast Asia. There are companies that are ready. If we are able to execute well, we should be able to have a successful SPAC.
JH: We’d like to earn the ability to close the deal, and have a successful business transaction. But in the meantime, we will be diligent. It’s really about finding the right company, and having trusted and knowledgeable, long-term partners.