A High-Growth Debutante Ball of sorts is months away. Dateless SPACs (i.e., special purpose acquisition companies) would be wise to fix their gaze on the hot young Southeast Asian start-up market if they don’t want to be left without a dance partner.
If 2020 was the year of the SPAC, 2021 is the year of the de-SPAC. An astonishing 248 SPACs raised $83 billion on U.S. exchanges in 2020, and another 298 SPACs scooped up $87 billion just in the first quarter of 2021. All these cashed-up SPACs are now racing to identify acquirable targets before a looming 18-to-24-month post-IPO expiration date arrives. Fortunately, foreign suitors of high-growth start-ups are welcome in Southeast Asia. Nascent tech companies from Singapore to Hanoi to Ho Chi Minh City yearn for capital to fuel their growth and view SPACs as an easy way to access the well-funded U.S. market.
SPACs have been around for decades, but their growing popularity opens up new opportunities just as traditionally overlooked Southeast Asian innovative companies are coming to their own. E-commerce, media, consumer, digital services, healthcare, and green technology attract venture funding and reach a critical scale in the region.
A Post-Pandemic Opportunity and Economic Boom
Southeast Asia has a track record of recovering faster than other regions in the face of global shocks. It is on pace again, with COVID fatality rates declining to 2.7 percent in Indonesia, 0.3 percent in Thailand, and 0 percent in Singapore as of February 2021. Steadily receding COVID-19 cases throughout Southeast Asia combined with a successful rollout of vaccines and increased government spending is forecasted to revive ASEAN economies in 2021 swiftly. Combined GDP is expected to rise by 6 percent. Spending online will bounce back rapidly and triple to more than $300 billion by 2025.
Many Southeast Asian countries also benefit from a tailwind as multi-national companies continue to diversify their supply chains away from an exclusive reliance on China as relations with the U.S. and other regional players remain fraught, and COVID shortages drive home the dangers of an overly concentrated sourcing strategy. Vietnam is poised for the fastest recovery with expected GDP growth of 8.5 percent thanks to growing trade with the E.U. and an uptick in manufacturing and service sectors profit, with Malaysia (7.8%), Philippines (7.5%), and Cambodia (6.9%) close behind. A glut of Southeast Asian companies now seeks funding due to the inability of investors’ to travel for more than a year, combined with an unwillingness to conduct virtual due diligence.
The ground is decidedly fertile.
Plucking the Ripe Fruit of Widespread Mobile Penetration
Southeast Asia has seen remarkable growth in mobile penetration over the last five years, with GSMA dubbing Indonesia, for example, an “emerging digital economy giant” and one of the top ten most improved countries since 2014. Due to infrastructure growth, affordability of monthly data plans increased higher education, and local content development, 25 million Indonesians started using mobile internet in 2020. Two-thirds of the country now own a mobile device.
Similarly, innovative start-ups in the Philippines are driving significant growth in mobile penetration of nearly two-thirds of the population, with more than half owning a smartphone. Unsurprisingly, the most significant percentage of these (74%) were young people ages 18-34, a particularly attractive demographic among SPACs.
Sub-Par Southeast Asian Stock Markets Spell Opportunity for SPACs
While technology shares led the startling rally in the U.S. markets following the initial lockdown in the Spring of 2020, investors in Southeast Asia are relegated to the sidelines. Laden with “old-economy” finance and real estate stocks, the MSCI ASEAN Index remains down 19 percent despite similar gauges for the Asia Pacific and world equity indices evening out year-to-date losses. Investors consistently overlook southeast Asian markets because they don’t include big tech names. This underperformance will likely be sustained as long as the global tech rally persists.
As a result, high-growth companies in the region are looking for more liquid and tech-savvy markets abroad. Tech companies are transforming the capital market through SPACs to raise funds and become the leading performer worldwide. Case-in-point: The April 13 announcement from Grab Holdings of a SPAC merger and PIPE sight a combined valuation of $40 billion ignited a chain reaction among a dozen regional start-ups valued at $1 billion becoming more interested in using SPACs to go public in the U.S. Grab is a Singaporean-based, pan-Southeast Asian company offering transportation, food delivery, and digital payments services via a mobile app and Southeast Asia’s highest-valued start-up that epitomizes the innovation and speed with which regional digital players are evolving. With an increasing flock of Southeast Asian unicorns, many of which are technology companies looking to go public, SPAC sponsors have plenty of targets from which to choose.
According to data compiled by Morrison & Foerster, seven companies headquartered in Southeast Asia have gone public in the U.S. via a SPAC since 2020, and eight more announced plans for an IPO via a SPAC . Grab’s archrivals in Indonesia’s Gojek and Tokopedia recently merged to form GoTo Group to create the scale required for a splashy overseas IPO. Peter Thiel’s Bridgetown Holdings SPAC is reportedly in talks with Indonesian travel unicorn Traveloka. At the same time, he revealed that his second Southeast Asia-focused SPAC, Bridgetown 2 Holdings, is in advanced negotiations to merge with Singapore-based PropertyGuru in a $2 billion deal. In sectors with few comparable firms or heightened uncertainty about valuations due to unstable markets, companies realize that listing via SPAC compared with an IPO can provide a faster pathway to public status and a greater degree of certainty around valuation. In a hot but uncertain market, the ability to compress a year-long IPO process into a three-month SPAC merger can be desirable.
Charting New Territory
SPACs are particularly popular listing options for IPO-ready unicorns in high-growth sectors like tech, healthcare, and fintech. Southeast Asia is one of the fastest-growing fintech markets globally, with expected market growth to outpace the U.S., U.K., and China. New businesses related to digital adoption, including education technology, health technology, and financial technology, have been tremendous success stories throughout the pandemic in the region.
Public investors will need to evaluate the risks associated with operating in “frontier markets” with the undeniable attraction of access to Southeast Asia’s internet economy, with 655 million people having leaped online in recent years. Clearly, companies from the region are going to be on a steep learning curve when it comes to U.S. accounting, governance, and internal controls standards. But the policy risk of investing in these companies, which are generally favorable or neutral towards the U.S. government's security and trade objectives, may be less than in China.
Given the success of the SPAC format, both the Hong Kong Stock Exchange and Singapore Stock Exchange (SGX) are both studying options to launch SPAC programs of their own, with Singapore apparently on a faster track to adopt the format. Whether they will be an attractive alternative to SPAC sponsor teams or private companies seeking large amounts of growth capital remains an open question.
SPAC IPOs from Southeast Asia’s most valuable start-ups in 2021 — from Gojek to Traveloka to Singapore’s PropertyGuru — suggest investors are primed to bet on growth in a post-Covid mobile era over the stability of financial institutions, resources, and industrial conglomerates that have long dominated Southeast Asia’s corporate landscape.
The tech industry in Southeast Asia, home to about a 10th of the world’s population and some of the fastest-growing economies, is overdue for recognition. Established markets have experienced similar trends over the last 30 years, and it’s now Southeast Asia’s turn to enjoy a golden age of start-ups.
Buckle up; a moonshot can be bumpy.