What you need to know about the Vertex SPAC IPO

TL;DR

• Vertex Technology Acquisition Corporation (VTAC) is set to be the first SPAC to list in Singapore on 20 Jan. VTAC is backed by a Temasek’s Vertex Ventures Holdings, whose global investment platform and domain knowledge should be helpful in sourcing for acquisitions.
• VTAC will be looking to acquire targets with a core technology focus within six fast-growing industries including cybersecurity, fintech, biomed, AI, consumer internet and new energy vehicles.
• VTAC aims to align sponsor and investors’ interests, and has put in safeguards in the SPAC structure such as depositing 100% of investor funds into a third-party account.
• While VTAC is promising, investors should make sure they are aware of the SPAC product structure. Investors should also think about how having SPACs in their portfolios would align with their investment objectives and risk appetites.

Recap: What are SPACs?

What happened?

Vertex Technology Acquisition Corporation (VTAC) is expected to be the first Special Purpose Acquisition Company (SPAC) to be listed on the Singapore Exchange on 20 January 2022. SPACs have grown in popularity as listing vehicles in the US in recent years, and VTAC’s IPO is closely watched as it might give an indication on whether this asset class can potentially take off in Singapore.

VTAC’s IPO involves the issuance of 40 million units at an offering price of S$5.00 per unit. It has secured 13 cornerstone investors to subscribe to 22.2 million units. These cornerstone investors include subsidiaries of Temasek Holdings – Fullerton and Venezio, as well as established fund managers such as Lion Global Investors and UBS Asset Management.  The public offering consists of 0.6 million units, and is expected to close at noon on 18 January before the SPAC begins trading on 20 January.

What you need to know

Using Beansprout’s framework of analysing SPACs, we take a deeper look at (1) VTAC’s sponsor team and experience, (2) VTAC’s sector focus, (3) investor protection and alignment of interests to determine if the IPO might be worth considering.

1. Vertex has a strong sponsor team

As a blank check company with no operating history and assets, the quality of the sponsors could determine the prospects of the SPAC. This is quite similar to the importance of REIT managers in determining whether the REIT is well-run and is able to find quality acquisitions.

For those who are unfamiliar with Vertex Ventures, it is a 100% wholly owned subsidiary of Temasek Holdings, and is a Singapore-based global venture capital platform with over 33 years of investment track record. Vertex has an asset under management (AUM) of over US$5.1 billion, and an active portfolio of over 200 portfolio companies. These portfolio companies would include Southeast Asian super-app Grab, intellectual property analytics company Patsnap, buy-now-pay-later startup Pace, as well as payments platform Nium.

VTAC aims to create long-term value by leveraging on its global network, well-established shareholder ecosystem and deep local expertise. It also has significant experience in merger and acquisition (M&A) activity, having been investing in innovative technologies and divesting reputable portfolio companies through various exit routes such as stake sales of public listings globally.

The non-executive Chairman of VTAC, Mr Chua Kee Lock, is also the Group President and CEO of Vertex Venture Holdings Ltd, and has over 30 years of corporate technology and venture capital experience. He was previously the President of Biosensors Group (2006-2008) and Deputy President of NatSteel (2001-2003). The CEO of VTAC, Mr Jiang Honghui, was a Managing Director at Temasek Lifesciences Accelerator (2020-2021), and was Vice President of Investment at EDBI (2014-16).

2. Vertex seeks market opportunities with a core technology focus

VTAC’s mandate is to complete a business combination within 24 months from the listing date with a business having a core technology focus, highly differentiated products and scalable business models. In the prospectus, the sponsors gave abit more detail about the characteristics of the potential acquisitions, and these would include:

• Technology-driven
• Fast-growing and scalable
• At an inflection point of their growth journey
• Strong management team
• Cross border potential with market leadership
• Appropriate leadership

VTAC intends to focus on six investment themes which they believe are at the forefront of technology transformation. These industries are expected to have a 5-year CAGR ranging from 6.2% to 41.6% according to industry forecasts. Management also believes they have deep domain expertise within the areas of :

• Cyber security and enterprise solutions
• Artificial intelligence
• Consumer internet and technologies
• Fintech
• Autonomous driving and new energy vehicles
• Biomed technologies and digital healthcare

3. Alignment of interest between sponsor and investors

One of the key characteristics of SPACs are the safeguards that are provided to investors. Under SGX listing rules, SPACs are required to deposit at least 90% of their proceeds in a third party account (escrow) to safeguard the money invested until the acquisition is completed. However, VTAC has gone above the requirement by its commitment to deposit 100% of the IPO proceeds into the escrow account. As an investor of the SPAC, you may get your money back if you decide to redeem your shares or if the SPAC fails to find a target and liquidates.

SGX SPAC sponsors are also required to have a minimum equity participation to ensure they have sufficient “skin in the game”. In this regard, Vertex Venture is subscribing to 6 million units for S$30 million, making up 15% of VTAC’s S$200 million market capitalization post-offering. Again, this exceeds the requirement for sponsors to have at least a 3.5% stake.

One interesting feature to highlight is that Vertex has structured its units such that IPO investors will get 0.3 units of warrants per share. An additional right to 0.2 units of warrants will only be issued later to shareholders who did not redeem their shares at the point of business combination. This is intended to incentivize investors to hold through the business combination or De-SPAC, as investors who redeem their SPAC prior to that would only hold 0.3 units of warrants.

What would Beansprout do?

As the first SPAC to be listed on the SGX, VTAC definitely looks promising. What stood out the most to us were:

• The sponsor’s global investment platform and track record which should be helpful in sourcing for potential acquisitions
• Its domain knowledge on the investment themes identified, which are in fast growing sectors with huge addressable markets
• The structuring of the SPAC that demonstrates the sponsor’s long term commitment to make the SPAC succeed, while ensuring an alignment of interest with investors.

However, as a new product type, investors should make sure they are aware of the product structure and risks associated with investing in SPACs. Investors should also think about how having SPACs in their portfolios would align with their investment objectives and risk appetite.