Special purpose acquisition companies (SPACs) are facing a congested market for potential merger targets – particularly those seeking technology unicorns – after an eye-popping amount of fundraising in the first half of this year, according to the Hong Kong-based founder of investment firm Soul Ventures.
Billy So, a co-founder of Soul Ventures, said he was trying to take a more “late-stage, venture capital” approach with a recently created blank-cheque company, by focusing on smaller firms in the US that have the potential to be future unicorns and need help to expand in Asia.
“If the target company is close to US$1 billion or more than US$1 billion, it is really crowded. Why would a unicorn company need to [be in a SPAC merger] with you? Why would they not IPO themselves?,” he said.
Soul Ventures recently sponsored Inception Growth Acquisition Limited, a blank-cheque company seeking to raise US$90 million in an initial public offering (IPO) on Nasdaq later this year.
The investment firm, which has offices in Hong Kong and New York, was a backer of Epic Games, the maker of Fortnite ; Hong Kong logistics company GoGoVan, now known as GoGoX; and Tokopedia, which recently merged with fellow Indonesian technology unicorn Gojek.
SPACs do not have an existing business, instead they are created purely as a vehicle to raise financial war chests and buy assets within a specified period of time, usually 18 months to two years. They have been seen as an easier path for some companies, particularly pre-profit emerging technology firms, to go public and are primarily listed in the United States.
These blank-cheque companies collectively raised US$115.6 billion this year through July 26 in what has been one of the hottest fundraising trends globally in recent years, according to financial data provider Refinitiv. That exceeds the US$81 billion raised in all of 2020 and US$59 billion in the decade before that.
However, fundraising has slowed in recent months after a blistering start to the year, as fatigue sets in among some institutional investors and US regulators raise questions about the accounting for stock warrants common to the deals.
Fundraising for SPAC listings improved in June, but it remains a totally different market from 2020 and early 2021, So said.
“Last year, everything was oversubscribed. It was done in a day. It is tougher right now. We can see it is still doable,” he said. “Unlike April and May, when we were questioning when would the fundraising market resume.”
Given the massive amount of capital raised this year, another challenge for sponsors is private investment in public equity (PIPE) financing, a key component for acquisitions by most SPACs, So said.
“I think the PIPE investors will be more fundamental now, determine the price together,” he said. “They sometimes ask for sponsor shares or more upside for themselves. Right now, the PIPE market is the toughest part. We have to pick the right company. We have to pick a really good target.”
Soul Ventures, an investor in Fortnite creator Epic Games, is seeking to list a blank-cheque company on Nasdaq. Photo: Handout
According to its prospectus, Inception Growth will seek US or Asia-based acquisition targets between US$500 million and US$1 billion in the technology, media and telecommunications (TMT), sports and entertainment, and non-gambling gaming sectors.
The SPAC’s management team includes CEO Paige Craig, a venture capitalist whose track record includes more than 110 start-ups and investments in Twitter, Lyft and Postmates; and chief financial officer Felix Wong, who served in the same position at Tottenham Acquisition I, a SPAC that merged with Clene Nanomedicine in December.
Inception will primarily focus on US growth companies, most likely in sectors such as TMT and software as a service (SaaS), according to So.
“For us, [the perfect target is] under US$1 billion, has really good top-line growth, has good fundamentals in terms of the technology, the management team. Hidden gems is what we try to target,” said Warren Hui, a Soul Ventures partner in Hong Kong. “It has all of the features of what could be an amazing unicorn company in six to 18 months from now. These are probably the perfect SPAC targets. For these, we won’t be competing with 10 other SPACs in courting that target.”
Hong Kong’s stock exchange is considering changing its rules to allow SPACs to list in the city. Photo: Dickson Lee
Asian sponsors and target companies remain enthusiastic about these investment vehicles and bourses in Hong Kong and in Singapore are evaluating rule changes to potentially allow them to list.
A SPAC backed by Hong Kong billionaire Richard Li Tzar-kai and technology investor Peter Thiel agreed on Friday to acquire Singapore’s PropertyGuru Group in a deal that values the property technology company at US$1.8 billion. Southeast Asia’s most valuable technology unicorn Grab Holdings agreed to be acquired by another SPAC in deal that values it at US$39.6 billion.
Artisan Acquisition, a blank-cheque company backed by New World Development CEO Adrian Cheng Chi-kong, is reportedly in talks to acquire Hong Kong biotechnology company Prenetics, CNBC reported this month, citing a source close to the deal.
Hong Kong and Singapore are traditionally more conservative than the US and have less familiarity with the SPAC structure, so it may take longer for regulators to become comfortable with SPAC listings in the region, So said.
“In Singapore and Hong Kong, it is something new,” So said. “I guess it will take some time for them to figure out what is the right balance.”