Episode Twelve

SPAC's Roundtable: Jim Perry & Udhay Furtado of Citi and Abhay Singh of VMAC

30 March 2021


ALAN  0:13  
Welcome to Season 2, Episode 12 of the Indo Tekno Podcast. I'm Alan Hellawell, Founder of Gizmo Advisors and Venture Partner Alpha JWC Ventures. Selamat datang kembali, semuana. Since we last covered the SPAC phenomenon last December with the leadership of the NYSE, developments have continued to multiply in the space. We thus thought it timely to share with you the latest in SPAC's, particularly as it relates to Indonesia. We're extremely pleased to have two groups with us on this podcast. First, we have Jim Perry, MD and Co-head of Asia TMT Banking, and his colleague Udhay Furtado, MD and Co-head of Asia Equity Capital Markets, both of Citigroup. Citi is the world's largest underwriter of SPAC's (Special Purpose Acquisition Companies), with a 15% share of all SPAC's issued this year alone. We also have Abhay Singh, Co-founder and Group CEO of Vistas Media, a Singapore-based ecosystem of media and entertainment companies. Vistas Media Capital importantly raised a $100 million SPAC in August of 2020. It moreover recently announced a business combination with Anghami, which is a media streaming company currently focused on the MENA region, and is by far the market leader. Gents, thanks so much for joining us. Now, in compiling the questions for this podcast, I went out to no less than 20 founders of startups in Indonesia to find out what is on their minds. And maybe I'll start with Udhay. This individual is used to being courted by traditional investment bankers, and they're wondering what are the biggest things that we need to do differently and considering a SPAC versus the traditional IPO engagement?

Thanks for the question, Alan. This has obviously been an amazing innovation in the market in terms of how this has picked up as an alternative to the IPO. I would firstly say that many of the things that you were doing as a corporate are the same. You are still accessing the public market, you need to think about how you're positioning the business and getting to the broader public investor community. The difference here really is how you're engaging with a partner. And it's almost like it's a quasi merger process ahead of a public offering. And there are some tactics around that and how you engage with the SPAC which clearly, the bankers and your other advisors, will be helping you with. It is quite an intricate process in terms of engagement with the SPAC unlike an IPO, where you're essentially running the process and driving a marketing program yourself as the corporate issuer.

ALAN  2:44  
Very helpful Udhay. Maybe a follow up question for you. Now, Citi has done these back mergers across many industries and geographies. As an Indonesia-based tech company, are there any particularly prominent advantages to the SPAC approach for a company of our profile?

This has really taken off in a big way in the last 18 months or two years. And I think there are a couple of reasons for that in the advantages of the SPAC versus the traditional IPO. And most importantly, it's the time-to-market. You are essentially negotiating with one counterparty to get to the public market, versus the typical IPO process, which can be six to nine months as a corporate going through regulators and going through the full marketing process. So it is a very accelerated format. It's about half the time of a traditional IPO. You also get to market the forecasts for the business. You are as the company able to market your presentation to the public investor base. And that is quite different versus having a syndicate of research analysts talking about what they think could be happening in the forward years. And so we've had a lot of high growth. earlier stage businesses use this route. And it's been beneficial for them to be able to talk about the three year outlook or the five year outlook, for example.

ALAN  4:01  
Understood. Very clear, Jim, for you, on the flip side, what are the biggest potential pitfalls in being an Indonesian tech company doing a SPAC?

JIM PERRY  4:12  
Alan, that's a great question. As Udhay said, the biggest thing to keep in mind is that the end result of a de-SPAC merger is the same as the end result of an IPO. So one of the biggest pitfalls is being excited by the prospect of, we'll call it, "easy cash" or cash that appears to be readily available when you're not actually ready for an IPO. And if you pursue a SPAC when you're not quite ready, you may just end up wasting time. But in the worst case scenario, you actually become public and you're not yet ready. This could end up in either a deal that's too small and therefore you don't have enough liquidity; there's not enough investor interest. Or you become an orphan stock or worse. If you're not ready for the financial reporting, you can end up with technical issues around your listing. Some of the other pitfalls include things like potential tax exposure and issues with structure and regulatory. These are quite unique to companies in Indonesia, although companies in Vietnam and India and some other countries have similar issues around capital gains. And these are unique to merging an Indonesian company with an offshore SPAC. And with these, they can be solved between your lawyers and your financial advisors. And maybe the last potential pitfall is engaging with a SPAC partner who isn't really well versed in the specific challenges of Indonesia, or isn't that well versed in Indonesia in general. And in that case, you will come across some problems that you might not otherwise have in an IPO.

ALAN  5:33  
Thanks for that Jin. Now Abhay, congratulations on the recently announced merger of your SPAC. This founder asks, "We've been approached by SPAC's that seemed to have no previous connections with Southeast Asia and/or tech. So how important is regional or industry subject matter expertise with the sponsor, and its partners to the success of a SPAC?"

Thanks Alan, firstly, for having me here. Well, I would say it's fairly important. And there are multiple reasons for that. First, let's think of the whole process. Very rarely, you come across companies that would do an IPO and a merger at the same time, but in a SPAC environment, it's almost around the same time, wherein you start with an IPO. And then you have a quasi-merger situation, and everything in between and thereafter. So that also means that it brings in a lot of complexities. For example, it's important to understand that the sponsors get familiar with the tax and structural complexities for the target market. Let's not forget that there are three parties involved. There's the sponsor, and the tax jurisdiction associated with that. Then there's the initial investors that are associated and the target companies and it's relevant tax structures. So these things can get quite complex. Then there's of course, the whole issue of due diligence; things like the accounting policies that are being followed, because at the end of it, it's a US product. And therefore the companies have to comply with the guidelines for a US listing. These are some of the legal and structural issues that the SPAC sponsor needs to be familiar with. But additionally, there are also some other aspects. For example, how familiar is the SPAC shareholder with the market that they are going to operate in? And keeping in mind that if it's a non-US company, what is the familiarity of that company in the US, for example? So a lot of these factors, including finding the relevant PIPE (Private Investment, Public Entity) investors, you will see a trend where increasingly deals are looking for PIPE's. And it's always easier, obviously, when you are looking for a PIPE for a company that the market is familiar with locally. So yes, I would say it's fairly important for the SPAC's to have some kind of exposure to the market and to technology.

ALAN  7:34  
Thanks for that Abhay. Now another question for you Udhay: Is research coverage important for the target company to consider? Given that there is only one publicly listed tech company from Southeast Asia under research coverage, being Sea Limited (NYSE: SE) right now, what can we expect in terms of post-de-SPAC?

You're sort of hitting the nail on the head in terms of how you plan for the aftermarket. The benefits here, and I think the benefits of the current market, are that we're at a high point in terms of overall market liquidity and appetite. But we all need to think about the next couple of years. And as Jim and Abhay have both asked: how do we make sure there is a proper following for these stocks, such that they are not orphaned? And so research is a critical component of that, particularly as we think about a US listing and making sure that that local US market is very familiar with the story. And there must be an ongoing update through the quarterly earnings cycle that occurs in an aftermarket process. So yes, getting research; that's part of what happens in the de-SPAC process. As I said earlier, it is quite complicated. You need to think about the PIPE investors, the SPAC shareholders, and how you get a stabilized stock in the aftermarket, and then broader research coverage. There are lots of ways that can be engineered in a SPAC through research briefings and getting the broader syndicate around the stock. And it should be a big focus for every corporate in terms of the aftermarket IR plan.

ALAN  9:05  
A quick follow up on that. I spent 15 years as a TMT research analyst based in Hong Kong, and with every single one of the nearly three dozen IPO's, we necessarily had that pre IPO analyst presentation. But post de-SPAC, you're finding corporates basically setting up those analyst presentations subsequent to IPO. Is that correct?

That's right. The analyst presentations do get set up around the announcement time. And there is a closing period post a PIPE transaction in the SPAC process, which allows for the broader analyst community to be briefed on the transaction and what will then be the operating listed company. And then you're into sort of a more traditional kind of IR program, both in terms of the outreach to analysts and also a broader outreach to the public market investors.

ALAN  9:58  
Very clear. Thanks for that Udhay. Another question for you, Abhay, as a sponsor, what are the most important elements in successfully locating a target?

ABHAY SINGH  10:07  
Well, I think there are a few. For example, how ready is the company to go public? Like I said, going from being a private company to being a public company requires a whole change in the mindset. And a lot of times when you get access to the data room, it will indicate to you how ready they are. And then of course, many other factors. Then, of course, there is the expectation in terms of the valuation that they expect to be given when the merger is happening. Then there are of course the usual issues of how good, or how sustainable, or what is the quality of the business model that they are following right now. Are they agile enough to change with the changes in the external environment? At the end of it, the investment themes that are popular in the market at any given point in time has to buy the whole story that the company is trying to sell. So there are quite a few factors. 

ALAN  10:55  
Understood Abhay. Maybe, if you don't mind, a follow up question. How many potential targets did you guys look at before making your decision?

ABHAY SINGH  11:03  
We did close to 40 targets. We had different levels of discussion with each one of those. It was close to 40, I would say.

ALAN  11:10  
Okay, wow. Jim, what are the most common failure points in discussions between sponsor and target?

JIM PERRY  11:17  
One of the things to keep in mind about a SPAC is given the fixed life and fixed duration of the SPAC itself, the sponsors are generally motivated to complete a transaction. And as a result, most SPAC's will look to make a first decision quite quickly, and will walk away long before an LOI (Letter of Intent) if they don't think there's a good fit. And once they do think there's a good fit, you'll see that the SPAC's will be generally motivated to find a solution and a way to get to a transaction. That being said, there's a number of things even after an LOI that can come up, which can cause a deal to fail. So number one is something unexpected in the due diligence. And this can be a result of just the sponsor not understanding what he was getting into. But it can in some cases, be a result of a company that was maybe not being forthright in the beginning. And then things come out later. And so unexpected diligence findings is certainly one. And then we've also seen some SPAC's struggle after coming to an agreement on valuation with a company, and then having trouble finding PIPE investors at that same valuation. And then in a worst case scenario (and this only happens based on what we've seen less than 5% of the time), in a worst case scenario, the last point of failure is either failing to get the vote, or redemptions when the deal is finally signed, announced and put to the shareholders. And these would be probably the worst fail points. All of the earlier fail points are still confidential, and they will cause a waste of your time and the SPAC's time, but are confidential. Once the deal's actually announced, if you're unable to close, that's a much more dramatic fail.

ALAN  12:48  
Understood. So a few different potential pitfalls to remain mindful of. Jim, is interpersonal chemistry particularly important with the SPAC solution? I ask because there seems to be so much discussion around the pedigree of sponsors and their board members and advisors.

JIM PERRY  13:04  
Chemistry is always important in any strategic deal. For a SPAC, it's important, you have at least good enough chemistry. If the SPAC sponsor wants to be on your Board of Directors after the transaction, it's more important that you've got great chemistry. If that board seat for the sponsor isn't a strong consideration, then you at least need a good enough chemistry to get a deal done. But in any event, the SPAC sponsor will through its promote shares, be a meaningful shareholder in the company going forward. So it is important that you have a degree of rapport and a degree of chemistry and most importantly, a shared vision for where the company is headed, for how the company should be performing, and what are the key objectives and key milestones that the company needs to achieve in the first quarters after closing the merger.

ALAN  13:48  
Very interesting. Now Abhay, continuing with my question to Jim just now and maybe reflecting on your recently announced deal, do you envision there being big cultural or personality differences between, say, a sponsor used to doing US deals with an entrepreneur who has grown up in Southeast Asia?

ABHAY SINGH  14:05  
For sure, but it completely depends on the individuals that we're talking about, or the companies. Let's say if the target company is sophisticated enough to think and have a global vision, then they have to culturally be ready to do a merger or, like we say the marriage of sorts, with a target company from a different geography. So it really depends on who are the people driving these conversations, both from a sponsor point of view, as well as from a target point of view. Obviously, we expect that the sponsor should have international experience in the way they deal with companies globally, so that they are sensitive to cultural nuances. Also, what helps is the presence of very diversified advisors and board members. In fact, in our SPAC we had board members who were from everything from the US to the Middle East to Europe to Singapore. So that helped, and those things can become very, very sensitive. So yes, I would say it's extremely important that one is sensitive to these things and differences can happen if they're not handled well.

ALAN  15:00  
Understood. Another question specifically for you Abhay. As a sponsor, what were far-and-away the most important areas of support that you rendered in prepping your company for the public markets?

ABHAY SINGH  15:12  
I think the biggest support that we expected to give to the target company is the change in the mindset. We have to make sure that they think globally, we have to make sure that the thing big now. Sometimes we have to make sure that they have to think quarterly because at the end of it, the markets will wait to hear from them every quarter. And then of course, there are basic things like getting ready for the media and being media friendly, and at all given points in time being agile enough in the whole process, because it just takes a lot of time to complete the process. A lot of hand holding is required to be done for these founders who have built a great company. They're taking on their next step in the journey. 

ALAN  15:48  
Thanks for that Abhay. Jim, complementing Abhay's response; what areas of preparation or skill development have to be accelerated on the target company side when we talk about really compressing the traditional, maybe 18-to-24 month IPO prep period, into more of a six-to-eight month SPAC campaign?

JIM PERRY  16:09  
Sure Alan. Well, I think in our view, the best companies to engage with a SPAC are companies that are already ready for an IPO. And to many companies, we recommend that, if they're thinking about this route, that they prepare for an IPO first, and then reach out to SPAC's around the time of the first confidential filing, in a kind of a dual track process, as opposed to thinking of a SPAC as a real shortcut to becoming a public company or a shortcut to capital. The things that a company needs to think about in order to be ready for an IPO or a SPAC is: internal financial controls and accounting, the cadence of financial reporting and forecasting, the ability to put together quarterly numbers and provide quarterly guidance. And a great way to ensure that you're ready is to start doing this on a quarterly basis and presenting it to your board, both in terms of forward guidance, as well as results reporting on the same timelines that you need to do post an IPO. And then as you're actually getting ready for the IPO itself, you need to make sure that your audits are done in a way that is compliant with the PCAOB (Public Company Accounting Oversight Board) standards in the US. You need to make sure that you've got a big enough finance team to do the reporting fast enough. If you don't already have a CFO that has public company experience, it's a good idea to think about hiring someone that can help along those lines. And finally, making sure you're ready on a corporate governance perspective. In fact, it's not a bad idea to start putting on-board early independent directors as well as putting in place the functioning committees: the audit committee, compensation committee that you'll need as a public company before launching any discussions with SPAC's.

ALAN  17:42  
Wow. So you really do have your work cut out for you. What you're articulating is effectively so many the same activities that I used to participate in, but over a much longer period of time in my capacity as a research analyst. So, there's not a moment to waste once that agreement is reached. Now Udhay, what are the best ways to prep for what will be, for the entrepreneur, an entirely "brave new world" of being publicly traded, sharing results to the public every quarter, and constantly filing with the SEC? Any guidance or suggestions there?

I think as Jim highlighted, there is a huge amount to get ready for in a public market context. It is one of the biggest changes in many ways to a corporate, both in terms of management focus, skill set and culture. We've been doing this for many, many years. And we think back at some of the best-in-class companies that have come to the public market. A lot of them have started that preparation and well in advance, I would say one to two years in advance of an IPO event, because of the amount that you need to do. Whether it's the accounting side and the systems checks that you need to have in place quarterly. Whether it's just how you communicate the business to the public market. Alan, you yourself have dealt with the investor relations situation with big US-listed companies. It is an arduous task. There are hundreds of investors globally that will be pinging the business for information and you need to be well set up to deal with that. So there's a lot to do. It's about getting the right team around it, some experienced advisors around that. And, starting early, I would say just given all the things that Jim listed; whether it's accounts, financial controls, governance, systems checks, etc.

ALAN  19:29  
Very useful insights. Jim a slightly more specific and maybe technical question: for existing investors, how should they view what is usually the higher cost of equity arising from dilution to the sponsor, versus that associated with a conventional listing?

JIM PERRY  19:45  
That's a really interesting question that we get asked by virtually every company that we talk to about doing a transaction with a SPAC. So the first thing is that the cost of equity in the SPAC doesn't necessarily need to be that much higher than it is in an IPO. There's a couple of factors. So the one factor which obviously increases dilution is the sponsor promote, as well as the warrant package. Those two pieces together do increase the dilution from the capital raised. However, that is partially offset by the PIPE. And if you have a larger PIPE relative to the size of your SPAC, it will reduce the impact of that dilution, because the promote and the warrants generally only apply to the SPAC itself. Another way you can reduce the dilution is through negotiations with the SPAC. And we've seen a number of deals where there are adjustments made or thresholds that are set. And we've seen in lots of deals where there are adjustments made or thresholds set; a trigger set from where the warrants and or the promote may kick in. So that's another way that you can manage the dilution. And then the last way is around valuation. And one of the bigger differences that we see in a SPAC relative to a traditional IPO is the ability to have a smaller IPO discount. Now valuation still needs to be tied to the comps, and still needs to be grounded in reality. But the size and scale of that discount can be smaller in a SPAC and then an IPO. And so between these three things: 1) diluting the SPAC with a PIPE, 2) through negotiation with the SPAC, and 3) through setting a valuation which is closer to the public comps with a smaller discount, you can substantially reduce the higher dilution that you'd have in a SPAC relative to an IPO.

ALAN  21:27  
Very useful insights as to how to level that playing field. Udhay, one of the main differences between the SPAC and the traditional IPO is the ability, as you've mentioned, to furnish forecasts. We can see a lot of different interests weighing in on this ability. What advice do you have for us as a target company?

Look, we've seen a number of transactions and very high profile de-SPAC's occur in the US market. And particularly with some of these startup EV (Electric Vehicle) businesses which are pre-production, the marketing of forecasts has been quite important. And obviously the US regime is a disclosure-based regime. I think we always need to think about that when you're accessing the US market, that is different from other jurisdictions, that the disclosure base regime works because there is a litigious sort-of nature to the market. And you need to actually think about how you can stand by some of the forecasts as you make that disclosure going forward. And that's actually one of the things that we haven't seen yet in the SPAC market, because we're quite early in the de-SPAC processes. We haven't seen in the outer years, actually, how much variance there is between actual results and forecasts. So it's definitely something that needs to be balanced. It's definitely something that regulators are also looking at. It's something that lawyers and bankers and others will all be advising corporates around. And I think from a corporate perspective, balancing what you are comfortable showing and delivering; because it is something the market will focus on going forward, and it's something that you need to deliver. It's a very important consideration to have in mind. I would also say that for most of the conversation today, we've been talking about US SPAC's. We're going to start to see SPAC's happen in Singapore, in Hong Kong. And I would just say that, in some of these other regulatory regimes, the ability to go out five years, seven years, etc; it may be more limited just from a regulatory perspective. That's one other thing to keep in mind.

ALAN  23:28  
Great. Well, gents, it's been super useful to have been able to speak with the "OG's", or original gangsters, in the SPAC space. Some really useful insights. I hope that those in our audience who are considering writing a SPAC to the public markets will benefit from all of this. Thanks, a bunch for joining.

JIM PERRY  23:46  
Thanks a lot for having us. It's been a great discussion, and hopefully some of our insights into this SPAC process will be useful for your audience.

Alan, it was a pleasure joining. Interesting discussion. It's exciting times in the market, given some of the innovation we're seeing, and I think very exciting times in Southeast Asia and Indonesia technology, because we are going to see new routes to market. And hopefully this was helpful.

ABHAY SINGH  24:10  
Thanks, Alan, for having me here. It's a very relevant and a timely discussion that we had, and I hope that people can benefit from it. Thank you again.

ALAN  24:18  
I'm sure they will. As always, we hope our listeners have enjoyed today's episode. Please consider sharing any feedback that you have about the Indo TeKno Podcast with us. Terima kasih telah mendengarkan.  Sampai jumpa lagi!