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A New Dimension To Growth Investing: Southeast Asian SPACs

Southeast Asian SPACs can provide a new dimension to growth investing

This article is contributed to us by Gavin Chia, Managing Director of Futu Singapore.

A record 393 investments have been poured into start-ups in Southeast Asia in the first half of 2021, 20% higher compared to the same period last year, as investors are attracted by the region’s fast-growing tech sector, according to data from Cento Ventures.

For many high-growth companies, accessing additional capital to fund their expansion plans, such as through going public, can be vital to their journey. Recently, some of Southeast Asia’s biggest technology companies are looking to go public by merging with blank cheque companies known as Special Purpose Acquisition Companies (SPAC) in the US.

According to news reports, this club includes familiar brands such as Singapore-based super app Grab who from 2 December became listed on Nasdaq, as well as online classifieds marketplace Carousell, and Indonesia’s online travel unicorn Traveloka, just to name a few.

On popular trading platform moomoo, which has an in-app social community of over 220,000 users from Singapore, in posts such as this, users are keenly observing the business combination of Grab with the SPAC named Altimeter Growth. Altimeter Growth is sponsored by Altimeter Growth Holdings which is part of the Altimeter Capital Markets Platform, formed to invest in and help bring a world-class technology company to the public markets.

Unlike initial public offerings, SPACs can offer the possibility of a superior valuation through bilateral negotiation, and subsequently a shorter time to achieve the listing. And after going public, these businesses can also benefit from the SPAC’s Sponsor support. Sponsors help to create SPACs and typically have the expertise to identify prospective companies to do a merger with.

Sustained Interest In Growth Investing

The interest in high-growth companies comes amid what has been a low-interest rate environment arising from an era of accommodative monetary policy, leading to investors searching for yield. Although several central banks have begun tightening rates, growth investing remains attractive as many investors now seek to beat inflation.

Identifying winning growth stocks entails a focus on the current and future economic prospects of a company. Specifically, a growth-oriented investor would consider the company’s earnings per share (EPS) and signs of rapid EPS growth in the future.

But many growth companies are trading at relatively high share prices and their heavy investments to strengthen competitive advantages for the long term can also depress their profitability for several years in the near term.

Hence it would not be surprising if an investor wavers before investing in a growth company, because it can be incredibly challenging to ascertain which of these companies might continue to grow at an exponential pace into the future and if the narratives about their prospect are well-founded.

Growth Investing Through Singapore SPACs?

Having seen the boom in SPACs in the US, exchanges in Southeast Asia are also racing to become a SPACs hub, and to capitalise on investors’ interest in fast-growing technology companies.

Apart from the US, Singapore is another location that high growth companies in Asia can now consider doing a SPAC business combination with, and there would likely be better name resonance with investors there.

In fact, Temasek-owned Vertex Holdings, Singapore-based private equity firms Novo Tellus Capital Partners and Tumeric Capital, along with European asset manager Tikehau Capital, have been reported to eye SPAC listings in Singapore soon.

The upshot of these for public market investors in Singapore is that they soon have an alternative route to investing in high-growth companies earlier in their business life cycle where more gains may be made, barring unforeseen circumstances such as a meltdown in the financial markets.

To access the SPAC opportunity, public market investors can take a position in a SPAC during the SPAC listing when shares and warrants are issued, or before the SPAC enters into a business combination with a target company. This is an opportunity otherwise accessible only to private equity investors.

Through SPACs, public market investors will benefit from the expertise of top-class financial advisors and industry experts comprising the SPACs management team, and who has the fiduciary duty to identify a target high-growth company that it would continue to support post-business combination, for an initial period to be agreed upon by both the SPAC and the target company.

SPACs Investing Versus “Traditional” Growth Investing

While growth investing considers the current and future economic prospects of a company, growth investing via SPACs shifts the investor’s focus to the credibility and track record of the Sponsor and management team, and the extent to which the Sponsor is aligned with the interest of shareholders.

Investing in a SPAC also takes relatively more patience. The share price catalysts for SPACs are few compared to stocks in general, and there are no dividends distribution prior to the business combination.

SPAC investors should also be aware of dilution due to an element of Sponsor Promote (which is the Sponsor’s entitlement to additional equity in a SPAC at nominal or no consideration in return for sponsoring the SPAC) or warrants that could be converted into shares in the future. This will be part and parcel of investing in SPACs, and long-term investors may view it as a nominal down payment that may potentially reap returns in due course.

In Singapore, regulators have indicated that they want to build strong safeguards and governance into the Singapore SPACs structure to protect investors’ invested capital. To that end, a large part of investor’s principal capital investment will practically be preserved in an escrow account, up till the business combination is completed. As such, SPACs could theoretically be a stable investment up till de-SPAC stage, and investors could benefit from significant upside thereafter.

It is therefore important that one weighs the pros and cons and does the homework in evaluating SPACs before investing your money into them. One could consider taking advantage of SPACs educational content developed by moomoo, and made available on our app or website.

In sum, Southeast Asia offers an abundance of opportunities for growth investors to cherry-pick from. But if investors find growth investing challenging, the good news is that investors will soon be able to benefit from the expertise of highly experienced private equity professionals, through investing in Singapore SPACs.

This article is contributed by Gavin Chia, Managing Director of Futu Singapore (a subsidiary of NASDAQ-listed Futu Holdings Ltd). Gavin leads the Singapore team to grow its footprint through its intuitive & technology-driven moomoo trading platform, providing clients an enhanced & seamless trading experience. 

An industry veteran of over 15 years, Gavin has held key roles in business development and wealth management in several financial institutions, which he has leveraged for his current role. He is a strong believer in providing not only products to clients, but also in providing “High Touch and High Tech” services.