SPACs are gaining popularity but investors should do their homework
What is a special purpose acquisition company (SPAC)? How relevant is it to the real estate sector? What should real estate investors look out for when investing in SPACs? These were the pertinent questions at The Mapletree Real Estate Forum. The event took place on a historic day when Singapore’s first SPAC made its debut on Singapore Exchange. The country’s second SPAC also started trading the following day.
A SPAC refers to a company whose sole purpose is to launch an initial public offering (IPO) so that it can raise enough capital to acquire or merge with an existing company, which in industry lingo, is called a de-SPAC target. Also known as “blank check companies”, SPACs do not perform any commercial operations.
While SPACs have existed since the 1990s, they have gained tremendous popularity recently. As Melvyn Teo, Lee Kong Chian Professor of Finance at SMU, recounts, in 2010, only two SPACS were listed in the US; over the last two years, 600 SPACs were launched. In fact, these shell companies have raised US$83 billion in 2020 alone. Notable companies that have gone public through SPACs in the US include Virgin Galactic, Richard Branson’s space flight company; Nikola Corporation, the company that aspires to be “the Tesla of trucking”; Opendoor Technologies, a digital platform for residential real estate; and last but not least, Singapore-based Grab, which was also listed on the NASDAQ via a SPAC.
SPAC or IPO?
Ronald Tan, Vice President, Equity Capital Market, Global Sales and Origination at SGX, explained that while in a typical IPO, a company would have to subject itself to the arduous process of preparing itself to be listed. This undertaking is not only complex, but also costly and may turn arduous. Other uncertainties may also affect its IPO. For example, the company may also not be correctly valued because its business model is too novel.
By contrast, when a suitable IPO candidate is identified by a SPAC, the latter would have its management team and cash readied to negotiate and work closely with a sponsor and investors for the former towards a business combination. “The advantage of this process clearly is that the capital is at hand, they have with them a group of investors that are looking for a target that can be acquired,” says Tan.
That being said, both SPACs and traditional IPOs have their day in the sun. None is superior to the other; it is a matter of different strokes for different folks. Lock Yin Mei, Partner at Allen & Overy, highlights that a confident business owner who is ready to weather the book building process leading to an IPO will prefer to retain their shareholding than going for the de-SPAC route. “If you're doing a de-SPAC, you're actually giving a portion of your company to the founders of the SPAC target. So the question [is] whether an owner of a business is prepared to do that.”
Rather than seeing going SPAC as a putative “expressway to an IPO”, Tan emphasised it is simply another route, not a simpler one, for a company to become listed. “The process to de-SPAC a target is no different from an IPO. So the regulatory rules, the due diligence expectation from the regulatory side of SGX as well as MAS [Monetary Authority of Singapore] is exactly the same. There is no arbitrage.”
Strong Investor Interest for SPACs
In Singapore, in addition to receiving units or shares in a particular SPAC, retail investors are also offered stock warrants, which allows them to purchase the company’s stock at a specified price. This would be an attractive feature if the SPAC were to acquire a promising company. There seems to be strong investor demand for SPACs. The demand for the first SPAC, Temasek Holdings’s Vertex Technology Acquisition Corporation Ltd (“VTAC”), was so strong that it was 36 times oversubscribed.
Indran Thana, UBS’s Managing Director, Global Banking Head of SEA Consumer, Healthcare and Real Estate, highlighted another reason retail investors favour SPACs: SPACs allow them to take advantage of opportunities that have been exclusive to private equity and venture capital.
This is because a SPAC would have been able to identify a highly promising de-SPAC target, for example a startup in a high-growth area. Ronald Tan elaborated, “What is typically in a private equity space, now we are bringing it a little bit forward to the public capital markets, allowing investors to participate with good, credible sponsors.”
Getting the Right Sponsor is Key
The role of the sponsor cannot be understated. Working with a knowledgeable and credible sponsor is key. Using a hypothetical example of Elon Musk acting as a sponsor to de-SPAC an electric vehicle (EV) company to illustrate this importance, Tan says, “If Elon Musk said, ‘Okay, I think I like your business. I love it’, [the EV target] ha[s] the option of going IPO…or de-SPACing with Elon Musk. Guess who will you choose in the end? The chances are most people would go down the SPAC route.”
“The benefit that accrues to the potential target goes beyond a typical IPO. Now you have [Elon Musk as] an advocate; you have an expert, who has this network, who has the credentials that say, ‘I think you're suitable. I think that's the valuation.’ It gives [investors] a lot more certainty and benefits that [they] typically may not get in a traditional IPO.”
This becomes especially critical for a company which finds itself in a situation where its valuation may be harder to ascertain. “If you're an earlier stage growth company, you would look at this route as opposed to where the target probably has a very efficient market price out there already,” says Lock.
Caveat Emptor
Investors still need to pay attention to the fundaments, particularly when SPACs in the US are already coming under tremendous time crunch to find their right targets. Thana explains: “[The] deadlines are shrinking as well in the US; if you look at the most recent data, we're talking 16 months to 18 months. …So it really comes down to, are the people I'm giving my money to credible? Do they have domain expertise? What is the governance structure? Can I hold them to that governance structure? Will they do right by me?”
Thana further cautions being seduced by a celebrity sponsor-backed SPAC. Investors should pay close attention to the credibility and domain expertise of the sponsor. “The celebrity part, I worry about. I really like to think about it as, ‘Are the people behind it properly knowledgeable about the thing they're doing?’ and start from there.”
Tan also highlights investors should also pay attention to the accountability and due diligence paid to select the de-SPAC targets. He emphasises that the same degree of rigor needs to apply, regardless of whether the launching is a SPAC or an IPO. Strengthening investor education on SPAC and promoting neutral independent research on de-SPAC targets are also important steps to balance between protecting investors and giving them the power to decide, encouraging a vibrant stock market.
He elaborates: “All these things are basically to help our retail investors have the knowledge, have the transparency to make a decision. But the fundamental premise is this: you've got to do your homework. It cannot be, I'm going to buy [lottery], let's hope this is a winner, and tomorrow it's going to win.”
Prospects of Real Estate SPACs: “Not Your Traditional Brick and Mortar Stuff”
There may be room for some interesting surprise in the real estate sector, as a number of real estate companies have become de-SPAC targets or launched SPACs. Besides Opendoor (which combined with SPAC Social Capital Hedosophia II), there is also Sonder, a San Franciso- and Montreal-based hospitality company which became public in January 2022 via a SPAC backed by The Gores Group, a global private equity firm. Future Faraday, an American EV start-up, was publicly listed through Property Acquisition Corporation, a blank check company backed by real estate investors.
While the real estate sector, including the property technology (proptech) start-ups, might not be as attractive as sectors such as renewable energy and technology, media, and telecommunications (TMT), there remains inefficiencies that may be ripe for digital disruption. For example, Sonder, the technology start-up that leases service apartments and run them like hotels, has become a rival to Airbnb.
Given its novel nature, Lock contents that similar real estate companies could potentially become de-SPAC targets. Prof. Teo also highlights that they could be real estate assets that are more challenging to value yet come with a lot of growth potential.
About 204 from about 300 sign ups attended the forum in-person or online, which according to Bert De Reyck, Professor of Operations Management and Dean of Lee Kong Chian School of Business at SMU, was a record attendance for the forum.
Professor Melvyn Teo was the moderator, and Ronald Tan, Indran Thana, and Lock Yin Mei were panellists at the 3rd Mapletree Real Estate Forum that was held on 20 January 2022.
Last updated on 27 Jan 2022 .
