GPs see more paths to liquidity in Southeast Asia - AVCJ Forum

“SPACs (special purpose acquisition companies) are here to stay and I’m glad to see them around because they offer a differentiated approach to exits and to the public market,” said Jason Sambanju, partner and CEO of Asia-focused secondaries specialist Foundation Private Equity.

He positioned secondaries in a similar way. The argument is that if LPs recognize there is an alternative way to exit in Southeast Asia – allowing a GP to retain an asset by rolling it into a new vehicle backed by different investors and with different terms, rather than compelling an immediate sale – then they are more likely to commit capital to primary funds.

Secondary deal flow is at record levels, while SPAC sponsors are combing the region for suitable targets, typically high-growth technology companies. Ride-hailing and local services platform Grab agreed a SPAC merger at an enterprise valuation of $30.4 billion – the largest globally – earlier this year. PropertyGuru and FinAccel have since announced smaller deals.

“The biggest lesson I’ve learned is that sponsor choice is crucial. There are a lot of SPACs hunting for targets, and time is running out for some of them. If they can’t find a target, they must give the money back, so it’s not atypical for a potential target to receive lots of interest from SPACs at amazing valuations,” said Tushar Roy, a partner at Square Peg Capital. “What you want is someone who is aligned to help you in the long term, someone who understands your business well.”

Square Peg is invested in PropertyGuru and FinAccel. Roy noted that Victory Park Capital, the SPAC sponsor, knew Kredivo – the Indonesia-based buy now, pay later platform operated by FinAccel – for 18 months prior to the merger announcement and became the company’s largest debt provider.

Choice of sponsor is especially important in the de-SPAC phase, with institutional investors increasingly selective about participating in the PIPE transactions that counterbalance the mass of redemptions by short-term investors on completion of a merger.

“High-quality sponsors have the relationships you need to secure a strong PIPE. Others do not,” Roy said. “What we have seen with Property Guru and Kredivo raising their PIPEs during a downturn in the SPAC market is a real flight to quality. Things got very overheated, the pendulum swung the other way, and it became almost impossible to get meetings with a lot of PIPE investors.”

Other investors gave the SPAC phenomenon qualified support. Sambanju noted that in the current negative interest rate environment, a hedge fund doesn’t lose out by parking capital in a SPAC for 24 months and waiting for a merger. Behavior will likely change when interest rates rise.

Meanwhile, Soo Boon Koh, founding and managing partner of iGlobe Partners, observed that SPACs are not for everyone. “It is important to understand the fundamentals of portfolio companies, what the market position is, and the outlook for the next 5-10 years,” she said. “You must be confident in the long-term outlook and then the sponsor must be a match. The type of investor is very important, they can’t just be in and out.”

Roy added that there are many misconceptions about SPACs in the start-up community. It is often assumed that a SPAC is faster than an IPO and that it is a means of going public with a lighter form of reporting obligations. Neither is true. Companies must be ready to function as fully listed companies – with the right controls, team, infrastructure, and processes – before they embark on the journey.

Secondaries investors have spent much of the last 15 years addressing misconceptions and generally educating the market. “In 2007, I felt like Chicken Little, running around saying, ‘You should do this, you should do that.’ People looked at me in a funny way,” said Sambanju. “Now, when I make a proposal, they say, ‘That’s interesting.’”

Foundation sees opportunities in Southeast Asia involving venture capital portfolios because the industry is still in its infancy and portfolios are taking time to mature. But more generally, there remains a significant mismatch between the amount of capital raised and deployed in the region and the amount that has come out in the form of distributions.

“The region has historically been plagued by a lack of liquidity and optionality,” said Thomas Lanyi, a managing director at CDH Investments. “Not long ago, few economies were large, and many were sub-scale for investors. The stock markets in some cases were underdeveloped, very speculative in nature, and over-regulated. Even today, it is difficult for LPs to get statistically significant data on exits in this part of the world when making strategic decisions as to where to allocate their capital.”

He is encouraged by rising liquidity and optionality. Alongside SPACs and secondaries, there are more sponsor-to-sponsor transactions as larger GPs are becoming increasingly active in Southeast Asia, while corporates and corporate VC units – notably those from China – are pursuing deals.

At the same time, capital markets across the region are becoming more sophisticated in terms of regulation and deeper in terms of liquidity. The Jakarta listing of Bukalapak, an unprofitable e-commerce platform, is evidence of this shift. However, Koh argued that some stock exchanges are behind the times, with Singapore still insisting that candidates demonstrate a track record of profitability.

“It’s the old economy and the old economy is dying. If they make the change, we could even capture a lot of Chinese companies,” she said, noting that with the US is seemingly off-limits for many start-ups, and the average waiting time for a Hong Kong listing is now two years.

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• Topics
• Southeast Asia
• IPO
• Trade sale
• Secondaries
• SPAC
• Secondaries
• regulation
• Singapore
• iGlobe Partners
• Foundation Private Equity
• CDH Investments Management
• Square Peg Capital
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