While the number of businesses being launched on a yearly basis continues to rise, numbering almost 214 million in 2020, the number of companies that are choosing to list is failing to keep pace.
While there are numerous benefits for issuers in going public, they have not created a strong enough incentive for companies to list in their respective markets, with a growing number of companies preferring to stay private. The disadvantages of taking a company public via traditional routes, such as an Initial Public Offering (“IPO”) or Direct Placement Offering (“DPO”), have seen an estimated 10,000 companies turn their backs on listing over the past decade. With IPO’s suffering from issues around: (1) time and (2) cost, and DPO’s struggling with: (1) volatility; (2) lack of capital; (3) less promotion; and (4) lack of external support, public financial markets have been in dire need for new avenues to bring investment opportunities to the market.
Against this floundering backdrop, we have witnessed the rejuvenation of a decades-old listing model: the Special Purpose Acquisition Company (“SPAC”) IPO. While technically not a “new” listing vehicle, SPACs have suddenly reemerged in recent years, bringing a renewed sense of life to the capital raising scene. Offering an alternative way to enjoy the benefits of listing publicly without having to experience the inconveniences posed by both traditional IPOs and DPOs, SPACs deliver salient benefits to issuers, sponsors, and investors alike.
Propelled by a differentiated value proposition, SPACs have been enjoying widespread adoption in Western markets. In 2021, year-todate (“YTD”) alone, SPACs accounted for 31% of proceeds and 24% of the global IPO deal volumes. With USD 133 billion worth of SPAC IPO proceeds being raised in 2021 at the time of writing (garnering over USD 2.5 billion in underwriting fees YTD), we anticipate a bright future ahead for SPACs. And having set Western markets ablaze with a newfound energy, SPACs are now knocking on the doors of major Asian economies, such as Hong Kong and Singapore. We estimate SPACs to account for USD 35 billion worth of Asia-Pacific (“APAC”) IPO proceeds by 2025 (~31% of total IPO volume), growing at a rapid compound annual growth rate (“CAGR”) of 78% from 2016.
Notwithstanding this positive outlook, there remain notable challenges to the prevalence of SPACs, including: (1) high underwriting fees; (2) target sourcing difficulties; and (3) lacklustre post-de-SPAC-ing returns. Target sourcing difficulties give rise to an intricate set of challenges faced by sponsors, including: (1) time limit; (2) supply-demand mismatch; (3) due diligence shortcomings; and (4) a dearth of expertise. Moreover, the over-reliance of the SPAC model on sponsors has exacerbated the magnitude of these hardships, as evidenced by a number of failed SPAC deals to date.
While there will always be risks involved in taking a company public via the SPAC route, we identify several critical building blocks that can aid sponsors in winning the race against time to successfully de-SPAC, including: (1) being operator-led; (2) network centrality; (3) geographic expansion; (4) versatile expertise; (5) robust governance; and a deep focus on (6) negotiation strategies.
With APAC gradually warming up to SPACs, we anticipate the floodgates of public listings are about to open in a manner that will truly be Spactacular.
