I nvestors in Singapore’s battered special purpose acquisition companies (spacs) may find wisdom in comic books. Captain America is a super-hero whose exploits have been featured in movies.
He is an immensely muscular and agile soldier. Captain America saves the world from alien terrorists. His main asset is a shield with the American flag as an emblem.
The shield acts as an offensive and defensive weapon. The shield is indestructible. It can absorb machine-gun fire. Bullets bounce off it.
Captain America also uses the shield like a frisbee to slay opponents. It serves as a battering ram when he needs to open doors.
Spacs are listed shell entities with the aim of acquiring a private company. The private company gets listed through a fast-track process. It avoids the cumbersome route for an IPO.
Like Captain America, spacs were designed to boldly venture into new areas. Spacs invest in disruptive areas such as tech, AI and electric vehicles.
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Like the shield, spacs have features that are both offensive and defensive. Spacs raise money to fund takeovers. At least 90 % of the funds must be held in risk-free assets until the reverse merger is completed. The funds must be placed in an escrow account operated by an institution licensed by the Monetary Authority of Singapore.
Shareholders may reject the eventual target. If so, the investors can redeem their shares. The investors will be paid cash plus any interest earned.
For example, $1,000 invested in a spac is held in escrow. The funds remain escrowed until they are invested or redeemed. The redemption right provides defensive protection to the investor. The redemption proceeds after two years would amount to $1,000 plus interest accrued.
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If the funds are invested, they are in attacking mould. The investment proceeds would be devoted to high-growth and risky companies. Singapore has swiftly introduced spacs on the back of their explosion in the US. Vertex Technology Acquisition Corp was the first Singapore spac. It was backed by Temasek Holdings and raised $200 million. Vertex will focus on cybersecurity, AI and consumer Internet companies.
Pegasus Asia raised $170 million in its spac IPO for $150 million. Pegasus Asia’s backers include Jean-Pierre Mustier, the former CEO of SocGen and Unicredit, two major European banks. Pegasus Asia will be looking for deals in consumer tech, fintech and property tech.
Novo Tellus Alpha Acquisition is the third spac. It is backed by a private equity fund led by Loke Wai Sun. Its cornerstone investors include Malaysia’s Affin Hwang Asset Management and an indirect, fully owned subsidiary of Temasek.
The three spacs have suffered. The three listed on the Singapore Exchange are down from their highs at an average of 10%.
This dire performance is part of the worldwide route. The spac market has been battered in epic fashion. The Spac Index is down 49% from its peak. Spac IPOs have ground to a halt. There were 298 spac IPOs in 1Q2021. There was an 80% y-o-y drop in 2Q2022.
The great opportunity in these three spacs is not in their aggressive plans. It is in their defensive features. None of the three has identified a reverse takeover target.
Instead, investors could gain from the redemption rights. All three are trading at a discount to the cash held in trust.
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Novo Tellus Alpha Acquisition is trading at a 7% discount to its par value. This would imply a return of at least 8%, if redemption is exercised.
In one movie, Captain America loses the shield. It gets stuck in an evil robot’s body. Without the shield, the captain was powerless. He could neither protect himself nor attack.
Captain America was written off without his weapon. This resembles the sell-off in the spacs.
However, he was eventually reunited with it. Black Widow scooped up the shield and returned it. Captain America went on to destroy the robot. Investors may want to bet on the beaten-down spacs.
Nirgunan Tiruchelvam is head of consumer sector equity at Tellimer and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in these columns
