The public listing dreams of Southeast Asia’s leading tech giants may soon turn into a reality. However, rather than via Initial Public Offerings (IPOs), the vehicle for them to do so will very likely be – as shown by the recent overtures made by Grab, Traveloka, Tokopedia and PropertyGuru – in the form of special-purpose acquisition companies (SPACs).
While there is a growing interest for companies towards SPACs in the region, it is borne from the trend set in the US – where, in 2020 alone, there were around 200 SPACs that went public and raised some US$64 billion in funding. It is seen as being such a viable alternative to IPOs that even WeWork is considering going public via a SPAC merger, after cancelling its 2019 IPO plans.
Yet, it might still be premature to say that the significant SPAC activity we’re seeing in the US will reach Southeast Asia. Given the region’s preference for IPOs, Southeast Asia is proceeding with caution – the Singapore Exchange recently proposed stricter regulation when it comes to the listing of SPACs.
While Southeast Asia’s unicorns are indeed signalling a shift, it won’t necessarily mean the death-knell for IPOs. Whether a company chooses to go public through an IPO or SPAC, they must first understand their objectives to determine which is the best vehicle for them to go public.
How IPOs have defined Southeast Asia’s history of going public
One reason why IPOs won’t be going away in Southeast Asia anytime soon is that last year alone, there were over 100 IPOs conducted in the region – raising nearly US$50 billion in funds and contributing to a regional capitalisation of almost US$30 billion.
In a way, this ran counter to the expectations that IPO activities would have dropped due to the economic challenges presented by the ongoing COVID-19 pandemic.
In fact, we observed that there has been an overall upward trend in the region’s IPO market over the past three years – though, the caveat being that the most significant activities were in major markets such as Singapore, Thailand, Vietnam and the Philippines.
For technology companies – especially startups that are scaling up, IPOs remain nascent. This is as one of the key challenges for young companies listing via IPOs is that they must get all the conditions right before going public. To be ‘IPO ready’, companies must balance their legal and accounting paperwork for regulatory compliance, whilst ensuring the company continues to speed towards its operational targets.
This is because, for a company to be ‘IPO-worthy’, it must have the business scale, organisational maturity and the mechanics that are ready to generate the perpetual growth, public markets expect of a publicly listed company.
Based on our own experience in the technology startup ecosystem, the last mile sprint for companies towards being IPO-requirement-ready might constrict management from making strategic decisions as they would normally, hence constraining them from taking the best foot forward for the business.
Instead, decisions might turn conservative for fear of stepping out of line from the tight IPO requirements. During this period, short term goals for a successful IPO might outweigh long term business visions.
SPACs – a viable alternative for companies to go public?
The momentum for SPACs in Southeast Asia is picking up, but it will be chiefly led (at least initially) by the technology sector. For companies like Grab, Tokopedia, Traveloka and PropertyGuru, SPACs may serve as a quicker way for their investors to also exit via the US capital markets, which is more difficult to do than via IPOs.
This is since SPACs provide greater speed, flexibility, and more importantly, relative control over pricing and valuation over conventional IPOs. For these tech companies, local IPOs might not be able to provide the liquidity and pricing multiples that they desire – due to fewer available comparables in the market and the less certain nature of their business.
For instance, the flexibility SPACs provide may be more beneficial for companies finding it hard to squeeze their business ambitions within the tight regulatory suits (to be IPO-ready). This means that they may find it easier to align their vision with SPAC sponsors towards a common vision.
Yet, this doesn’t mean that SPACs – even for young companies – are the most clear-cut answer for tech companies. While companies themselves exiting via the SPAC may find the vehicle mostly beneficial to them, there’s a major risk that is borne by the SPAC’s investors.
This is as the performance of the SPAC is largely dependent on the ability of the SPAC sponsors to identify a truly suitable candidate and to negotiate a favourable deal on all sides.
IPOs are here to stay
Despite the growing interest in SPACs by companies in Southeast Asia, we believe that IPOs will still have a strong role to play in the region’s listing activities. From our own observations, there have been many IPOs in the data, machine intelligence and enterprise software space recently.
To illustrate, our research of companies listed in the US markets in the abovementioned sectors have for the past five years consistently outperformed the S&P, DJIA, and Nasdaq indexes by 4x – 5x. This is an encouraging sign for regional companies, as US markets are usually a precursor for how the regional market will react.
A strong US performance not only validates the opportunity in regional markets but allows for straightforward comparables to base valuations on.
Additionally, within a few years after a successful US listing and saturating the US market, these enterprises will look outwards towards Asia to expand and grow their revenues. Usually, this will result in the form of mergers and acquisitions.
No zero-sum game between IPOs and SPACs
We predict that SPACS will continue to be a highly viable option for companies in Southeast Asia eyeing a public exit. SPACs provide a faster turnaround time and downside protection for investors, in addition to a more relaxed listing criterion for aspiring enterprises looking to go public.
However, to say that they will replace IPOs – especially as the benefits would mostly be reaped by emerging technology companies – is still too early as our observations and research showed that there are still many companies (even tech ones) enjoying success via more conventional channels.
Instead, we, and the rest of the region, can expect to see a renaissance in public listing activities due to SPACs rising as a feasible alternative.
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