Opinion divided on SPAC-tacular route for foreign listing of start-ups

With shares of special purpose acquisition companies (SPACs) tumbling from their February peak (various SPAC indices say they are down 20-30 per cent), opinion is divided over whether they are still an attractive route for Indian start-ups making a beeline for this route to list their companies in the US.  

The companies reportedly considering the SPAC route include Grofers, PolicyBazaar, Flipkart, among others. However, the companies have officially maintained a stoic silence.  

The country’s first big-ticket SPAC listing of ReNew Power is already underway, with investors being brought in, and is expected to be listed sometime in the early third quarter of this year. 

SPAC – also known as a blank-cheque company – is essentially a shell corporation set up by investors with the sole purpose of raising money through an initial public offering (IPO) to eventually acquire another company. But initial investors have the option to redeem their shares without losing any money, and the company has to go for a fresh raise from a new set of investors.

The big problem, many say, is the dissonance between the different kinds of investors. The sponsors who set up and manage the SPAC get a free promoter stake of 20 per cent in the company and can make huge multiple returns within a few months. Their focus is to promote the target company performance and increase valuation, which directly benefits them.

The initial investors also have the choice of redeeming their shares before the SPAC is listed after being merged with the target company. It is a safe bet. They are also issued free warrants to sweeten their entry, which they can sell at a market price. There is no downside. 

But the new investors who come in – in case the initial players have opted for redemption, or a follow-up fundraise is necessary – buy the shares at a premium and have no protection against a downside. 

Says Parth Gandhi, founder and chief investment officer, Bombay Capital: “SPACs are an alternative liquidity mechanism for investors in unlisted companies. However, the key issue is to get alignment between sponsors, initial investors, target company investors, and retail investors. As in all ‘flavour of the moment’ trends, there is usually some reality and a significant hype. Investors have to look through the hype and find the few SPACs which actually create value for investors, as opposed to just sponsors and initial investors.”

Even large Indian private equity (PE) funds with stakes in start-ups looking for an IPO are not too sure they are the best route for start-ups.

Says a chief executive officer of one of the leading Indian PE funds: “They are just a quick way to list. They offer investors an exit by back-door listing mature companies. I don’t see any benefit in this route for start-ups.”

There are others who have a more positive view, Says Bala Deshpande founder of Mega Delta Capital: “For Indian companies, getting on to SPAC can be a good step towards an ultimate listing on the main bourse or a strategic consolidation. But for this to work companies should get the choice of the SPAC absolutely right, else they would be stuck in no man’s land.”  

But many say the fall of SPAC stocks is primarily because of overhype of these companies — many of which are in the technology space.

“What we saw are PowerPoint companies with a strategy and product in place, but no operations and no earnings before interest, tax, depreciation, and amortisation (Ebitda). They promise sales maybe two years down the line. While their shares moved from $10 to $50 within months, it was not sustainable,” says a chief financial officer of an energy firm, keenly surveying the SPAC market.

The senior executive adds that speculation on the US Securities and Exchange Commission planning to closely scrutinise such companies and frame new rules, and fears of interest rates coming up have also pushed prices down.

Others say the strategy on opting for SPAC depends on the industry. Renewable energy, for instance, has been a hot favourite and well understood in the US. For instance, SPAC companies have cleared over 35 mergers worth over $95 billion in green energy, electric mobility, and sustainability since March 2020, according to data from SPAC Research.

For instance, ReNew Power was able to get offers of over $1 billion from new investors. While it needed to raise around $700 million, it decided to retain $850 million.

Analysts say, as a result of this deal, it will have no impact if all the initial investors decide to redeem the entire $335 million raised from them in the IPO. It has also been able to tie up with sponsors for a lock-in period for their exit.

More importantly, the company is supported by a strong balance sheet – an Ebitda of $650 million – a string of ongoing projects, and existing assets.     

Merchant bankers who have been following the company say one of the key reasons to list in the US rather than in India is the depth of funding available in the US, especially through environmental, social and governance players, which is still in its infancy in the country.

Moreover, the SPAC model also gave them an early look into the mindset of institutional investors — how favourably disposed they were to an Indian renewable energy operator.