When Southeast Asian ride-hailing giant Grab announced that it was delaying its highly-anticipated SPAC merger with US-based Altimeter last week, it raised more than a few eyebrows.
Audit issues were the key drag, explained Grab, with its Indonesian e-wallet OVO being the centrepiece of this accounting quagmire. The SoftBank Vision Fund-backed decacorn is now in the throes of re-aligning three fiscal years of financial reports in accordance with the US SEC’s audit standards.
“I did not expect Grab to be held back by issues like audit reporting at all,” said the chief executive of a Southeast Asian tech unicorn exploring a SPAC listing, who did not wish to be named. “Grab has some of the world’s strongest investors and advisors on its board. You would think that a hiccup like this could have been avoided, given the calibre of the people it’s chosen to surround itself with.”
Nevertheless, Grab chief executive Anthony Tan told Bloomberg earlier this week that the company is confident of meeting its Q4 deadline for a US listing.
Any failure on the part of Grab could possibly impact how Southeast Asian startups are perceived.
Impact on SE Asian startups
The stakes for Grab are high. At $40 billion, Grab isn’t just one of the world’s largest SPAC deals. It’s also the first in Southeast Asia to entertain a deal of this kind. But the blip affirms an oft-held overseas perception that Southeast Asian tech companies, as a whole, still lack the fundamental structures required to go public in the US.
“There’s going to be a steep learning curve for Southeast Asian companies, as far as US accounting, internal controls, corporate governance and standards are concerned,” observed Drew Bernstein, co-chairman of Marcum Berstein and Pinchuk, a US- and China-focused audit and advisory firm based in New York.
“I think they [Grab] could be in danger of missing this [IPO] window if they’re not careful, and it would really be a shame if it did because it’s one of the bright spots for Southeast Asia. It’s brought attention to them in such a positive way. I hope these are mere growing pains rather than serious problems, but I’m not surprised that this is happening,” he added.
“Speed to market” has tended to be one key appeal that SPAC sponsors brandish to target companies. According to PwC, a SPAC merger can be executed as quickly as 5-6 months, compared with 12-24 months for a traditional IPO. But a generous dose of reality is still needed when it comes to Southeast Asian targets, say industry observers.
There’s no question that the SPAC is a proven option for pre-IPO firms, but this applies almost exclusively to companies and investors domiciled in the US, or offshore tax havens like the Cayman Islands or the British Virgin Islands.
According to Nick Davies, partner at law firm King & Wood Mallesons, there’s been very little focus by target companies or SPACs on how to navigate the intricacies of a de-SPAC transaction in countries like Indonesia, Vietnam, and India. A de-SPAC transaction refers to the process of a SPAC merging with a target company.
“US SPACs have generally been looking at Southeast Asian transactions from a US perspective and US tax construct…De-SPAC transactions [also] tend to rely on structures which are appropriate to US investors — largely driven by US tax concerns. Reconciling this with the current investor and shareholder base in Southeast Asia can be super tough,” said Davies.
“I suspect that’s a key factor for why we see Indonesian companies such as GoTo taking more steps of re-organising through a merger and conducting a fundraise prior to de-SPAC, compared to Grab, which was already structured as a Cayman holding company and could fit more easily into existing de-SPAC structures,” he continued.
SPACs begin to downsize
Meanwhile, SPACs have been targeting Southeast Asian unicorns in droves. According to Frank Troise, managing director of SoHo Advisors, there can be as many as 12-15 sponsors chasing the same target in Southeast Asia — a result of having too many SPACs clamouring after the same unicorn handful. This dynamic, however, is about to shift.
SPACs have begun to downsize, driven largely by a glut of SPACs in the US market. In April, the SEC vowed to scrutinise more closely the revenue and profit projections put out by businesses going public via a SPAC. The watchdog has also issued a number of warnings over SPAC marketing and investor communications.
Last month, former Y Combinator chief Sam Altman’s AltC Acquisition Corp slashed its SPAC size by 60% to $400 million. Closer to home, Eduardo Saverin’s B Capital Technologies trimmed its SPAC by one-third from $300 to $200 million last week.
While this is still far from mainstream, Marcum’s Bernstein believes this will eventually pick up in the coming months as SPACs chase larger opportunities in the “mid-market” segment with companies valued around $500 million. “The average SPAC size is about $270-300 million right now…I think we’ll start to see more $50 million or $100 million SPACs launched,” said Bernstein.
“Smaller SPACs going forward will be the norm, not the exception,” echoed Billy Naveed, chief strategy officer of Smile Group. “It is a less dilutive outcome for targets and a bigger PIPE means that more institutional shareholders can participate and you have more targets and a more diverse base.”
Weeding out hobbyists
At the same time, market forces have also begun to shake out true quality SPAC sponsors from casual hobbyists. “They no longer have a seat at the table,” said Troise. “By hobbyists, I refer to sports personalities or celebrities who have lent their names to blank-cheque firms in the last year.”
These include names like former NBA sports star Shaquille O’Neal, Van Halen’s lead singer Sammy Hagar, and former Major League Baseball pro Alex Rodriguez, all of whom jumped onto the SPAC bandwagon in recent months.
“What the market is not paying attention to right now is that there is a queue of companies ready to list, and that queue is now accelerating again. There are still SPACs going public, and there has been absolutely no abatement whatsoever on the focus on M&A. If anything, that has intensified,” said Troise.
Meanwhile, SPAC sponsors with strong track records will continue to chase their second, third, and even fourth targets— however long the market will allow them, say experts. This applies to blank-cheque firms in Southeast Asia too.
Singapore-based Vistas Media Capital is now gearing for two more US-listed SPACs this year, following its successful first SPAC merger announced in March. The $100 million Vistas Media Acquisition Company is currently in the final stages of completing its merger with Middle East media streaming platform Anghami.
According to Vistas, the two new SPACs will be over $200 million each “in order to target larger companies.”
“SPACs will remain an asset class. The more serious sponsors and genuinely good companies will continue to choose the route and the frothiness will disappear,” said Abhayanand Singh, co-founder of Vistas Media Acquisition Company.
Impact on SE Asian bourses
But the next big question is what all this will mean for Southeast Asia’s local bourses. Singapore’s SGX and Indonesia’s IDX have each expressed interest to allow SPACs on their exchanges, with the former already in the final stages of hashing out the fine print for its SPAC listing framework.
In March, Southeast Asian investors expressed concern over what they perceived to be “overly stringent” measures regarding SPAC listings on the SGX, including setting a minimum SPAC value of S$300 million ($223 million) before allowing them to list. The figure was considered to be “too high” for the industry, and could potentially render the SGX uncompetitive compared to far deeper US exchanges like the Nasdaq or NYSE.
Experts warn that if the downsizing of US SPACs continues to persist, many more Southeast Asian tech companies will find themselves inevitably snapped up by US bourses — even before the SGX gets a chance to play in this SPAC boom.
“Unless the SGX listing regime becomes more accommodating or accessible to tech companies, I think they will struggle to attract tech listings using SPACs,” said Davies. “To support local tech sector growth and exits through SPACs, some of the listing rules probably need to be tweaked to recognise the accelerating effect that a SPAC transaction can bring to a tech company’s growth and profitability.”
The SGX will release an updated framework for SPAC listings around mid-year.