RIYADH: SPACs could reshape Gulf financial markets, bringing together savvy investors and disruptive startups.
Last week, the Abu Dhabi stock exchange, known as ADX, introduced its first SPAC framework, paving the way for these types of companies to launch on the exchange.
A SPAC, also known as a blank check company, is a special purpose acquisition company that goes public despite having no real business. It raises money from investors to buy into another company, but the funders don’t necessarily know the name of a specifically targeted company, only the general areas in which the acquisition company wants to buy.
“SPACs also allow for diversification into listed sectors, which are too focused on banks, real estate and telecoms,” former chief economist of the DIFC business district, Nasser Saidi, told Arab News. “They will provide support for startups, especially those in disruptive sectors and later-stage companies.
“Target companies will certainly include promising technologies, financial technology companies, the media industry, health and education, as well as renewable energy and clean technology.”
Driven by strong liquidity and the growth of the high-tech sector, SPACs have recently exploded. There were 613 listings worldwide for a total of $145 billion in 2021, up from $80 billion for 247 SPACs the previous year, according to figures from consultancy Nasser Saidi & Associates.
These vehicles usually have about two years to find an acquisition target, or risk being liquidated and returning money to investors.
Being purchased by a SPAC may be an easier way for a private company to go public, as disclosure rules are more relaxed.
Still, SPACs are not without their problems. The U.S. Securities and Exchange Commission said last December it was set to tighten scrutiny of such companies after launching multiple investigations into such listings.
SEC Chairman Gary Gensler said in a speech that in some SPAC launches there was “inconsistent and differential disclosure” between different parties.
“Currently, I think the investing public may not have similar protections between traditional IPOs and SPACs.”
The SEC investigates whether fee structures incentivize bank underwriters on SPAC listings to pursue unsuitable transactions, and then, at a later stage, the same bank may act as an adviser recommending the transaction to unsuspecting investors.
The Dubai Financial Services Authority, the market regulator of the DIFC, has issued guidelines for registration of SPACs to mitigate some of these risks. For example, the listing of each investment vehicle will be studied on a case-by-case basis. This will also force it to confine the proceeds raised from investors.
Another problem is that often SPAC species can spend a lot of time looking for a home.
“If you look at the 2021 cycle, 82% of 2021 SPACs are still seeking deals and only 3% of SPACs have completed their deals,” Saidi added.
SPACs also face a changing financial environment as central banks tighten global monetary policies to fight inflation.
The fact that regional economies will benefit from soaring oil prices does not necessarily mean that this money will be injected into SPACs, but rather used to buy government initial public offerings, Saidi pointed out.
“The process in the Gulf Cooperation Council countries will be more institutionalized, as regulatory frameworks look at the American example and avoid the mistakes that have been made there.”
This has not dampened the regional appetite for SPACs.
Last July, Shuaa Capital announced its intention to create three SPACs, with a capital of 200 million dollars. Mubadala Capital unveiled a $200 million blank check IPO last August, which will seek acquisitions in the media and technology sectors, according to Saidi.
Satellite launch company Virgin Orbit, which is also backed by Abu Dhabi’s sovereign wealth fund, the Abu Dhabi Investment Authority, has agreed to go public with a SPAC deal with NextGen Acquisition Corp. II, which launched earlier this month with a valuation of $3.2 billion. .
Additionally, Tadawul’s Saudi CEO Khalid Al-Hussan said last December that the exchange is considering whether or not to allow SPACs to list with 50 IPOs in its pipeline.
Saidi said, “The future of SPACs remains bright as the region has many dynamic start-ups. SPACs will fill the void, given the underdeveloped venture capital and private equity sector in the region.