SPACs as Labor Unions
Why jet-settings SPACs may bridge the public-private divide in Southeast Asia
Good morning all,
I wanted to welcome the new joiners and thank the OGs who have been onboard for the last few months for helping to spread the word. Additionally, appreciate the notes from many of you - informed feedback is always welcome. Onto the content…
This week, we explore:
How the shrinking landscape of public companies meets the perfect cocktail for Spacmania
The multiverse of SPAC interpretations - the new IPO, the regulated ICO, the Reverse LBO?
SPACs as labor unions - pushing back against the swelling private markets
How SPACs can bridge the public-private divide in Southeast Asia at a crucial point of inflection in the tech ecosystem
I know US readers may be getting a bit of SPAC fatigue. The topic, trendy in March, is now about as over-played as “Levels” Cancun springbreak 2012. On top of that, Bill Gurley of Benchmark fame stole a bit of thunder just releasing this hearty piece on the ascendance of SPACs, including:
Links to SPAC basics for the uninitiated
Data on the acceleration of SPACs over the last 10 years
The pros and cons of IPO vs Direct Listings vs SPACs
It’s an informative piece (and / or tirade against the current “rigged” IPO process) which concludes SPACs offer a real “door #3” to private companies with more certainty, better speed, and - given increasing competition - better pricing relative to chronically under-priced IPOs. The horse is dead. The wheel invented. The story written (12.9 million stories actually).
However, I have yet to come across any articles bridging the US SPAC explosion to tech in Southeast Asia.
Well, ladies and gentlemen, you’ve come to the right place. A special venue where Spacmania meets ojeks, redemption rights meet warungs, and the reverberations of US$4 trillion in Fed stimulus are felt in the battle for eWallet consumers in Indonesia.
The TLDR on those 12.9m articles:
SPACs are “blank-check” companies which raise capital and go public as a pool of cash looking for a merger target. If investors do not like the target once found, they opt out. The process functionally serves as a potentially faster and less-complex IPO. Instead of a road show, you negotiate with one sponsor. As opposed to ~9 months to IPO, you can get it done in as little as 2-3.
While SPACs have been trickling up for years, 2020 presented the perfect cocktail for Spacmania: a starved IPO-market, a pandemic, US$4t+ in Fed stimulus, and the gamification / influencer-laden day-trading storm all converging into one of the most volatile markets of the 21st century. In short, SPACs are booming:
And keep in mind, this US$31b+ is gross proceeds. Per the Harvard Law Forum:
SPACs typically seek to combine with target companies that have a value of two to four times the amount of their IPO proceeds… the average post De-SPAC equity capitalization (excluding earn-outs) has been approximately 2.9 times the size of the post-IPO SPAC capitalization.
In other words, the potential “take-public” market cap floating around in blank-check companies is currently above or will shortly pass ~US$100b. This mountain of capital is heavily incentivized to be deployed within just 18 - 24 months.
The Multiverse of SPAC Interpretations
>US$100b in market cap coming to the public markets is not a small number. How should we interpret this phenomenon?
Are SPACs a more efficient, cost-effective version of the IPO per Bill Gurley?
Are SPACs a vehicle for companies to speed to market and cash-in on hype per Byrne Hobart?
Are SPACs a symptom of US$4t in printing and the next logical step in the deflationary asset bubble per yours truly?
Are SPACs a function of a liquidity lag between public and private markets amidst a pandemic?
Are they all of these combined?
I think yes. And more.
My own interpretation is SPACs are a more efficient IPO, trying to capitalize on hype, fueled by monetary-induced moral hazards, on the back of a lag between public and private markets - all on top of pent-up retail demand; pissed-off after being barred from investing in the world’s best performing asset class.
SPACs are kind of like a “reverse LBO” or the “regulated ICO”. A vehicle for the little guy to buy back into the action. Dare I say it - SPACs are kind of like “retail investor labor unions”, the little guys banding together to change market structures and how financial profits are allocated.
Despite monetary-driven asset inflation pushing markets to all-time highs, the number of public companies has been shrinking.
While new IPO activity has declined, the global market for private equity, including venture capital, has swelled fivefold in the past two decades to $4.2T (Preqin 2018, so a bit dated). A combination of massive growth / private equity war-chests, blitzscaling tech champions, industry consolidation, and the cumbersome costs of going and staying public have severely restricted the investible universe for retail investors - particularly in the best performing industry: tech.
In an already unequal world, many of the best companies, in their highest return stages, are only available to high-net worth individuals and institutions. Not only are retail investors getting blown out of the water by Silicon Valley firms in their day jobs, but they are restricted from investing in most of the sector (1). They see a new wave of companies coming for their livelihoods, the only sector producing outsized returns in the U.S. economy, and want a piece of the action. Why should HNWI, PE Barons, and white-collar VCs maintain a monopoly on rounds B, C, D, E, F, G for the next wave of world-changing companies?
The average Joe wants in.
The truth is, Gurley is right. The IPO process does under-cut pricing for the founders, the employees, and early investors to the benefit of institutional anchors. However, what Bill doesn’t harp on is the fact that he and his VC cohort benefit from artificial scarcity in the private markets the entire way up. If there were true market forces at work, and retail investors were not restricted in the private markets, early and growth stage deals would be much more competitive, valuations would go up, and Benchmark’s stake at IPO would go down (this is more applicable to later stage funds than Benchmark… but you get my drift).
Retail investors are so desperate to get as close to the private markets as possible, they are now willing to invest BLINDLY. Crowdfunding, P2P platforms, ICOs, and now SPACs are all symptoms of the same disease - retail investors looking for every work-around possible to get access to one of the decade’s best performing asset class. An asset class they have been increasingly excluded from as public companies disappear.
The real story with SPACs is not the “rigged” IPO process. The real story is the arbitrary regulatory barriers between retail and the private markets. PE / VC investors love to talk about the “over-supply” of capital, but the truth is, they are in a gated community. If those gates ever came down, the supply of capital chasing innovation would increase dramatically. Relative to haggling over the best way to list, entrepreneurs and employees would walk away with a whole lot more of the company.
SPACs are a step in the right direction. But it’s interesting to think why they have come about in the first place? Should they even be necessary?
The average Joe wants in…
The Public, Private Divide in Southeast Asia
Which brings us back to the >US$31b now sloshing around in the US looking for >US$100b in market cap to bring into the public markets. A trend which could be a short-lived fad or a revitalization of the public markets in an era awash with cheap capital.
SPACs are not only a work-around for retail investors trying to access a high-performing asset class / sector, but a bridge for private companies who have been left out in the cold of the US$4t stimulus.
You see, there’s a lag between public and private markets. LP’s are stewards of capital. As stewards, they are often (rightfully) cautious. When the S&P500 drops 30%+ in a matter of days, the responsible thing to do is to “wait and see”. This has a cascading effect down the chain of deployment. LPs are slower to invest in GPs. GPs are slower to close funds and deploy. Capital starved startups start making cuts to extend runway and “ride things out”. All of this further accentuated by a pandemic which makes conducting diligence cumbersome in a world of global capital flows.
Contrast that with the public markets which rebounded quickly after massive central government stimulus. A rally led by tech champions which are all trading at or near all-time highs - soaring past pre-pandemic levels.
In Southeast Asia, there is just one large public tech company. $SE jumped from US$40 to US$150+ YTD while many private competitors - Grab, Gojek, Tokopedia, Bukalapak etc have yet to receive the multiple expansion and cost of capital subsidy from the fed-backed stimulus now rippling through the public markets.
In a deadlock race, at an inflection point in winner-take-most, network-effect-driven industries, this cost of capital boost is crucial. Ecommerce, Ride-hailing, Digital Financial Services - are all high-burn sectors where cost of capital can be a key differentiator. Since the pandemic, the influx of capital and the rising multiples in the public market have tilted the playing field towards public players.
SPACs offer a chance to level the playing field. While the traditional IPO road-show may be long, slow, and unproven amidst a pandemic, time is of the essence given power law returns in tech. I also imagine the returns generated by SEA Group this year and the 650m consumer in Southeast Asia coming online are now on the radar of SPAC sponsors looking for growth companies to bring back to US exchanges. To be fair, the decacorns are likely out of reach (with the potential exception of Ackman’s mega-vehicle). However, the slew of companies trading between US$500m - US$5b could be interesting targets.
Jet-setting SPACs have the potential for a win-win-win:
1) Retail investors win by getting earlier access to high-growth companies abroad
2) Sponsors win by capitalizing on the current lag between private and public markets
3) Southeast Asian tech companies win by accessing the currently subsidized public market funds faster in a crucial stage of competition
I, for one, think spacmania is here to stay. I’m also thinking it may have a layover in Southeast Asia.
1) By number.