The global SPAC wave, that has arrived in Southeast Asia’s shores, may not create much of a flutter in the region’s fastest-growing economy, Vietnam.
SPACs, short for Special Purpose Acquisition Companies, are listed shell companies that are created to merge with other firms, providing an easy route for the latter to list on the bourses, sometimes overseas.
Also called blank cheque firms, SPACs targeting Southeast Asian startups would normally prefer high-valued unicorns or soonicorns, given their size of $200-300 million. “The number of companies that match with that profile are only a handful in Vietnam,” Niraan De Silva, a board member of SoftBank-backed VNLIFE, pointed out.
VNLIFE, the parent firm of Vietnam’s digital payments major VNPAY, became a unicorn late last year. De Silva, however, declined to comment on whether VNLIFE would seek a SPAC merger.
Vietnam’s only other unicorn is the internet giant VNG Corporation that achieved the $1 billion-valuation milestone in 2014. In 2017, the company trumpeted its plans for a Nasdaq listing, raising hopes of the country’s first overseas IPO. The plan has not materialised yet and multiple reasons, from timing to regulatory issues, have been cited for the delay.
VNG did not comment on its US listing plans.
Low visibility for Southeast Asian brands
Last month, DealStreetAsia reported that there were a dozen SPACs looking to list Southeast Asian companies in the US.
On reading between the numbers, it becomes clear that this is just a fraction of the 248 SPACs that raised $83.3 billion globally in 2020. This year, the global market has seen a mega craze — 260 SPACs have raised $84 billion so far, according to SPACInsider.
“More than 90% of these US-listed SPACS are domestic-focused, meaning they will acquire US companies,” said Sam Van, an IPO expert and head of corporate advisory at Deltec Investment Advisers Limited. “Your business might be known in Vietnam, but it may not be well-known in the US. The challenge becomes how you can get the research analysts’ attention to publish reports to the investors,” he said.
Although Singapore-based Sea Ltd. has become a case study in conducting a successful US IPO, it is an exception rather than the norm. It has not been easy to sell the Southeast Asian growth story, especially now with the political turmoil in Myanmar.
“Within Asia, if you are a Chinese investor, you understand and believe in Southeast Asia’s growth. But it is a bit more difficult for investors in the US to buy into the story as they’re watching from afar,” added Terence Fong, a Singapore-based venture capitalist and lawyer. Fong is also the co-founder of Speed, a technology startup focused on AI and education, which he has exited.
In the case of VNG, the lack of branding is said to be an important factor behind its delayed Nasdaq listing. “VNG’s branding is not strong enough in the international market. Its core gaming business has only started a global expansion and has no great achievements. The company is also focusing its resources on ZaloPay [a digital payments app] but it’s very capital intensive and dire,” said a local venture capitalist.
While SPACS seem to be a great option from a startup’s perspective, on the sponsor’s side, there are a lot of questions to consider, said Fong.
Legal and other hurdles in Vietnam
The legal practices governing overseas listings are not yet in place in Vietnam, let alone norms around SPACs.
It is understood that Vietnamese businesses that want to pursue an IPO in the US must get approval from local regulators although Vietnamese laws do not specifically prohibit them from such transactions. “It’s decided on a case-by-case basis. If the government feels you’re in a ‘sensitive’ sector, like VNG in gaming, a US listing is, for now, virtually impossible,” said a local tech expert on the condition of anonymity.
“I can see the reason why it needs to be protected because Vietnam is a young market. At the same time, freedom for entrepreneurs in seeking outside capital can be beneficial to the emerging economy of Vietnam,” Van opined. “It should be viewed as an opportunity to generate foreign direct investments (FDI), a pool of capital in US dollar converted into Vietnamese dong ready to deploy to local companies.”
That said, even if a Vietnamese company succeeds in going through layers of government bodies to get the nod to list in the US, the major issue is ‘What will come next?’
Founders should be aware of the internal operational structure and financial reporting complexity, particularly when Vietnam’s existing accounting standards are not up to the US Securities and Exchange Commission’s (SEC) standards.
“If a business is not ready, the SPACs would not want to waste their time, as they have only an 18-24 months lifespan before a merger,” Van noted.
In the case of VNG, Van asserted that a conventional IPO would be a better choice. “As most of the SPACs would get redemption, there’s a great cost associated with a SPAC. You have to go through backstop financing, or a PIPE transaction, and that will lock you in a specific price where you have to give up more warrants,” he explained.
Direct listing might also get better support from the Vietnamese government because SPACs are still a new beast for regulators, Van added.
Another blocker to a SPAC transaction, Fong reckoned, would be getting all of the existing investors of a company to roll into the SPAC. “In a region like Southeast Asia, there are very different levels of sophistication between investors.”
Take the failed e-commerce merger between Tiki and Sendo, even as it is a domestic merger, the dissent among shareholders was the very deal breaker.
Companies that put SPACs into their fundraising checklist, should consider the after-effects of de-SPACing. Following the reverse merger, the companies are required to ensure that their operational milestones, agreed with the investors, are reached.
“In a lot of the transactions, the companies have very little revenue and are just valued based on innovative ideas. They may not perform well after the combination, and the investors can file a lawsuit if they can’t deliver,” Van revealed.
“SPACs that just want to quickly get it done with and then adjust the business forecast will tank on the bourses,” he said, suggesting that SPACs could approach the targeted companies in a way private equity firms would do and hold the entrepreneurs and founders accountable.
DealStreetAsia had earlier published a short series highlighting how several Vietnamese startups failed because of lack of oversight and proper corporate management.
Michael Lints, partner at Singapore-based Golden Gate Ventures, opined that whether or not to take the SPAC route can be decided if a founder steps back and looks at the company’s mid- to long-term goal. “SPAC is a big advantage for high-growth companies that have strong revenues, good margins, and a very strong leadership team. If you’re on the smaller end, you’re setting yourself up for a lot of risks and a lot of public scrutiny,” he told DealStreetAsia.
If the purpose of merging with a SPAC is fundraising, there are a lot of other sources of capital available for Vietnamese startups, given the abundant PE-VC dry powder targeting Southeast Asia and the rising attractiveness of the Vietnam market, according to experts DealStreetAsia spoke to.
Meanwhile, the prime purpose of having a SPAC is to scout for an exit. However, given the above reasons, SPAC exits do not sound optimal for Vietnamese startups.
“Acquisitions will continue to be the larger portion of exits,” said Lints. He suggested founders should think of which scenario they want for the next 5-6 years: to work together with a big corporation in an acquisition, to be in the public market, or remain private and stay on the fundraising trail.