MALAYSIA SPAC COMING BACK ALIVE?

INTRODUCTION TO SPAC.

Special Purpose Acquisition Vehicle (SPAC) or sometime also known as blank check company. Hence the name called blank check since the company does not operate any commercial business other than to pool the money in form of Initial Public Offering (IPO) units until the targeted company is found to form a merger. The targeted company must has commercial business. Typically SPAC is given maximum 2 to 3 years to complete the merger or else the pooled fund in the trust account will be distributed back to investors. It is consider low risk investment given this protective feature to investors even though the investors do not know what they are investing in.

Generally SPAC will consist of:

1. Sponsor: The founder of SPAC or management team , usually consist of expert in particular industry, seasoned investors, private equity firm, hedge fund.
2. Investor.

Not every SPAC in every country will have the same features, it depends on the jurisdiction of the country SPAC are publicly traded.

Both U.S & Malaysia SPAC have common features:

• The targeted company for merger must has fair market value of at least 80% of amount held in the trust account.
• Merger with the targeted company need to be done within 3 years maximum period from its IPO date. In U.S generally speaking is 2 years but extendable to 3 years with shareholders approval.

But different in below features:

• Sponsor initial capital requirement.
• Targeted company for merger must be approved of at least 70% of shareholders in the US, but in Malaysia it is higher requiring 75% approval before the merger can be finalized.
• Once identified the targeted company's sector in the prospectus, in U.S the SPAC team is not obliged to buy targeted company in that particular sector but it is obligation in Malaysia.

NUMBER OF SPAC IN U.S VS MALAYSIA

In United States, the trend for SPAC IPO has been trending up since year 2016 and incline rapidly in year 2020 until today.

But this is not the case in Malaysia, the SPAC IPO issuance has not garnered much attention from investors. Only 5 SPAC IPO have been issued in Malaysia history and only 2 of them managed to close the merger deal in time.

WHAT DROVE RAPIDLY THE GROWTH OF SPAC IN U.S since 2020?

1. Low interest rate policy entice investors to flock to another higher return investment such as SPAC with relatively low risk.
2. SPAC sponsors shifted their focus from Value to Growth stock. Since the pandemic hit, technology & healthcare have rapid growth & more than 60% listed SPAC had successful merger in these sector in year 2020. Hence, growing more investors attention for SPAC in these sectors.
3. Acceleration in retail trading activity since lockdown. These retail traders have high demand for highly volatile shares with potential of hyper growth prospect.

SPAC PERFORMANCE IN MALAYSIA

In term of performance of the stock, I divided into two phase (pre merger & post merger) performance. For pre merger the average compounded annual growth rate (CAGR) for those 3 SPAC is 166%. For post merger, the average CAGR for those 3 SPAC is -23%. All those SPAC in red text did not manage to close the merger in time and it was liquidated. The historical stock price for those liquidated shares are not available.

WHY SPAC NOT POPULAR IN MALAYSIA?

1. Regulation that overprotect the investors create an opportunity for certain investors type to play arbitrage. The game rule that allow investors to get their cashback right in the trust fund during share redemption make it possible for investor to seek risk free investment if they manage to buy the share below IPO price.
2. All those 5 SPAC in Malaysia history have 1 free warrant attached per unit of SPAC IPO. This warrant has dilution effect, hence not many shareholders in favor of the merger because it will dilute the stock return after merger deal is closed and the warrant is exercised. Unlike in US, most SPAC IPO usually only has fractional unit warrant attached per IPO unit.
3. Previous history shown SPAC most unlikely to complete the merger deal. Even it managed to close the deal in time, past stock performance shown the stock did not perform well after merger.
4. SPAC sponsor cannot took part of their share on the pool trust fund. Hence they took huge loss compared to IPO investors on their initial capital, opportunity cost and time & effort to seek for the qualifying assets if they cannot complete the merger. Historically low conversion of the SPAC deal in Malaysia could not attract many sponsor to invest in SPAC.