One of the pillars of strong capital market is the availability of capital and conducive policy from Market Regulators, for enabling innovations with the capital, for ensuring liquidity as well as providing an exit to the investors, without compromising the interest of small shareholders. SPAC is a great innovative structure for providing exit to investors as well as creating wealth for the sponsors of the SPAC. It allows a great flexibility in terms of raising money from public in a shorter duration, for the purpose of downstream investment in unlisted firms.
Just to put it in a very simpler terms, structure allows pooling of money between sponsors, Institutional Investors and Investor Community for making investment in unlisted firm. The resulting cash loaded company reaches the market for raising cash from retail investor trough IPO. Retail investors subscribe to this shell vehicle. Now you have a listed firm with 100% cash, without any operating business but a promise to make an investment in some good unlisted firm that may bring great value to all the subscriber of the SPAC.
Now to put it right, sponsor is reaching the retail investor saying, hey you invest in my vehicle. I will hunt some good business in two years from now and that business will give you good returns in future. In a normal IPO, retail investor is buying a pie of operational business. In SPAC, retail investor is giving money to sponsor to find a good business for them.
Sponsors enjoys the best of SPAC. In SPAC structure they have the flexibility to charge management fees on the corpus, like an AMC business. Further they enjoy the benefit of deferential class of shares, that may lead to equity dilution of retail shareholders holdings.
In US, SPAC has been existence for long but has never been widely used. It was centric to those firms which had difficulties in going to market due to quality and public scrutiny challenges. However, things have changed with time. With the Unicorn boom, it became an innovative structure, providing exit to Investors of the acquiree company, with better certainty about exit price and terms of the deal. The flexibility of the structure and the availability of deals make it attractive for the parties to enter the contract. Retail shareholders subscribe to the issue with a trust on the management, for achieving the investment objectives defined in the documents filed with SEC. Once the deal of acquisition is done by the Investors, transaction needs to be ratified by the shareholders. Listed firm absorbs the unlisted firm and unlisted firms becomes listed in the process.
In India, SEBI is also working on a SPAC like structure. Many of the SPAC in US has eroded investors wealth due to quality of acquisition. In India, many of the players in the fund space, asset managers, large institutional players etc will be using the structure for pooling money and acquiring the unlisted firms. Idea may be appealing but sufficient safeguards need to be in place as any wrong investment decision, governance gaps, related party influence etc will directly impacts the retail investor. But the time has come, when Indian Markets can start testing with the innovative structures, as many of the unlisted business/ start-ups are promising but capital starved. The business will get capital, retail investors will get an opportunity to participate in few quality unlisted firms and sponsors will get their share. A good SPAC will be a win-win deal for every player and will indeed be very healthy for the ecosystem. Also, not to forget in long term the success will be determined by the quality of business and not innovation in the structure
Bureau Galactik Views