The SPAC Opportunity:
Andy Tai of Goldman Sachs
6 October 2020
Greetings everyone and welcome back to Indo Tekno. Selamat datang kembali semuanya! My name is Alan Hellawell. I'm founder of startup consulting firm Gizmo Advisors, and Venture Partner at Alpha JWC Ventures. With this, our 18th episode of Indo Tekno, we return to our "From Warung to Wall Street" series by inviting back to our podcast Andy Tai, Managing Director of Goldman Sachs. We've hauled Andy back into our studios to address what is one of the biggest questions to which I personally hope to seek an answer in having created this Indo Tekno series. And that question is: when will Indonesia deliver its first significant tech IPO's to the public markets? In other words, when can we reward the country's leading entrepreneurs and their investors with a public event? When can we offer a broader opportunity to the investment public through an IPO? For those of you who have been reading the financial press of recent, the increasingly popular SPAC ("S...P...A...C") may prove to be a powerful vehicle in delivering some of Indonesia's most exciting tech companies to the public markets. Welcome back, Andy. You must feel quite special being the first returning guest to Indo Tekno.
ANDY TAI 1:25
Hi Alan. Thank you for having me back. I really appreciate the opportunity, and I'm always excited to talk to you and the audience as well about various topics.
You're very welcome, Andy. Let's get right to it. First question, as everyone would expect: what exactly is a SPAC?
ANDY TAI 1:41
Well Alan, a SPAC, or a Special Purpose Acquisition Company, is a company that is publicly listed, with no commercial operations. People tend to form SPAC's through an IPO process to raise capital. But I think to be clear, at the time of the IPO, there is no real business nor targets that the SPAC has identified. The purpose of the SPAC is to acquire an existing company. In the old days, they used to call this SPAC's "blank check companies". SPAC's actually have been around for a couple of decades already. It's only in recent years that they have increased in popularity, again, given that there are a bunch of very credible investors and executives in the market looking to raise capital to acquire high growth, exciting tech companies.
Gotcha. So basically, I could tell everyone: "Hey, this is Alan. You've known me for a long time. I'm a successful investor. I'm going to create a vehicle that will buy a private company. And I'm going to IPO this vehicle and raise the money that I'm going to use to buy that company." So that's what you mean, when you say at the time of IPO, it's not an operating company?
ANDY TAI 2:53
That's correct Alan. In your example, for very seasoned executives like yourself, I think that is the intent. When you take a SPAC public, you're really relying on the reputation of the person like yourself, who for purposes of our discussion today, we can call you a "SPAC sponsor." When we only take a company public, the market, or the investor base, is relying on the reputation and track record of the SPAC sponsor itself. And saying that these eyes are really credible, they're experienced, and they can generate x alpha returns, and hence investors should actually invest in the SPAC.
Gotcha. So, I go and I officially announce that I'm doing an IPO, which is a SPAC, and maybe I raise $500 million through that IPO. Can you tell us from that period, on how does the SPAC acquisition process work?
ANDY TAI 3:46
I think what's important to understand with the differences between a SPAC acquisition and an IPO is, in a SPAC acquisition, it's more akin to a merger and acquisition process, rather than a listing process. So what do I mean by that? In a listing process, you have a prospectus, you have to do a lot of disclosure. But more importantly, there is an investor marketing and price discovery process in a typical IPO. In the SPAC process, because it's a merger or acquisition; one, you need to negotiate the acquisition price with the SPAC sponsor. Subsequently, when there is an agreement between the sponsor and, let's call it the "target company," there will be a shareholder vote that is required from the SPAC investors themselves to finalize and approve the actual merger, or transaction. So in a SPAC acquisition, the company itself actually merges into the shell company. And after that, typically what people do is they rename the SPAC company, and there's also a "de-SPAC'ing" process as we call it, to further institutionalize the shareholder base. I think those are the key differences.
As you may recall, in my past life as a research analyst, preparing, for instance, Alibaba for IPO was possibly a six or nine month process. For me as an analyst, I would build my model. I would start talking to investors. They would file their IPO prospectus. I would then go on the road to educate people about Alibaba: "What is ecommerce? What is a storefront," etc. Then the management team would hit the road and meet investors and start building demand for the IPO. None of this happens with a SPAC, because you basically already raised the money through the vehicle. And then, if I am the sponsor, if I'm the guy behind the SPAC, I'm the one who goes to look at what company I acquire. I propose the acquisition of a private company. It might be out here in Southeast Asia. And then you're saying shareholders of the SPAC need to approve that transaction? Is that correct?
ANDY TAI 5:56
That's correct, in a sense. I think that a key difference is that there is a shareholder approval process, whereas in the IPO, there isn't. But I think for full clarity, as part of getting that shareholder approval, I would say that there are some things the target company would be doing as well, that are similar to the IPO process. For example, once you agree with the SPAC sponsor to do the merger itself, as part of the shareholder approval process, the SPAC itself will actually need to distribute what we call a "circular," or shareholder prospectus, as well. And so a lot of the details in the prospectus or circular tend to be similar to what you will see in an IPO from a disclosure standpoint. The second thing which you talked about is, before the actual pricing of the IPO, you go meet investors, as the target company. What's slightly similar in this case as well is, once you agree to the parameters of a merger with a sponsor, they will take you around to meet the investors of the SPAC as well, because ultimately, the goal is to make sure that you get a high approval from the shareholder vote to actually close the transaction. The last thing I would say that is slightly different from the IPO, and that's a benefit for the SPAC process, is a lot of times in the circular or the process, there is flexibility for the sponsor, or the target company, to provide forward guidance. And I think that is actually very helpful to guide investors and get approval for the SPAC merger process.
Now, Andy, is it true that more than 100 SPAC's have emerged in North America this year alone? And of them, do you have any idea what percentage of them have a tech mandate?
ANDY TAI 7:42
I think you're right, Alan. At the last count, there have been about 125 SPAC's raised this year, which I think represents over $39 billion of capital that has been raised through the SPAC process. I would say more than half of the SPAC's raised have a tech mandate, which may not come across quite naturally when you read the circular. I think the reality is, with digital disruption being prevalent, a lot of the traditional industries can actually be included as well as a tech mandate, given that there's so much digital disruption across multiple industries. On the Goldman side, we have been fairly active and strong advocates around SPAC's. Year-to-date, we have underwritten 22 SPAC's already. We have created six SPAC's in the last two weeks alone.
Now Andy, can you share with us a couple examples of the highest profile tech SPAC's of recent?
ANDY TAI 8:39
If you look through some of the SPAC listings that we have done from a tech perspective, I would highlight two that would be interesting. One example is the Dragoneer Growth Opportunities Corporation, which is a $690 million dollar SPAC that we listed in August this year. Why is it interesting? As you well know, Dragoneer is a very well renowned global tech investor in both private and public markets. They have investments in Alibaba, Slack and Snowflake. That's one high profile tech SPAC IPO. The other example I would give is another SPAC called dMY Technology Group II, which was a $276 million SPAC led by the ex-CEO of Glu Mobile. It's notable and high profile because this is the second SPAC that we have raised for the same sponsor within a period of 18 months, as well as the fact that it's led by a very credible executive. Those two SPAC's represent I think, different ends of the spectrum whereby on one end you have a SPAC sponsor who is a sophisticated, well known tech financial investor. Hence investors came into the SPAC. On the other end of the spectrum, you have a sponsor who is a seasoned, well known credible tech executive who is raising a SPAC based on his operating track record.
Andy, what are the greatest benefits of the SPAC structure in your mind?
ANDY TAI 10:07
I think there are a couple benefits for the audience to think about. A lot of times, our conversations with companies is: what are the benefits relative to IPO? I think one benefit from a target company perspective is potential earlier market access versus an IPO.
Maybe Andy, you can spend a little more time on that. What do you mean in saying that?
ANDY TAI 10:33
What do I mean by that? Given that it's really a merger process rather than an IPO process, a lot of times, with the sponsor credibility, you can actually take companies public earlier than what you would through a regular IPO. The second thing, which I think is the most important is, the ability for target companies to provide clarity on difficult-to-understand investment stories, firstly, by giving forward guidance. One example I would give is, when Virgin Galactic got acquired by a SPAC, they actually were able to disclose projections through 2023. That is actually very powerful itself. The second thing is, when you think about clarity on difficult-to-understand investment stories, there is also more flexibility around disclosure around operating metrics to guide investors around how to think about and understand the investment story. The other example of why the SPAC acquisition structure is more beneficial is the ability to derisk through meaningful "testing-the-waters" (TTW) and investor marketing pre-announcement. As you think about the SPAC merger process, you first agree with the sponsor itself, what are the parameters of the acquisition, the transaction structure, the price. Subsequently the sponsor and you will draft a shareholder sector that has all the relevant disclosures. In between drafting, or after drafting, the sponsor and yourself would actually go and talk to, and present to, the SPAC investors themselves. And so in that private format, or what we call "testing-the-waters" and investor marketing, both the SPAC sponsor and the target company will be able to get real-time investor feedback about how investors think about the transaction, and investor feedback about the probability that the transaction will be approved rather than the SPAC investors redeeming their shares. Lastly is, to the extent that the merger is consummated, how the investor base will actually think about pricing the company on a post-merger basis.
Okay, these are all super important steps in the successful SPAC and "de-SPAC'ing" process right?
ANDY TAI 12:50
That's correct. And just to finish up, as companies think about merging with a SPAC, some other benefits we have seen is the potential "halo" from a very strong and reputable sponsor, and investor base. The last thing is that SPAC's generally have more flexibility around purchasing secondary shares. So, for a lot of companies who may be profitable but have a long standing shareholder base already, the SPAC merger allows some of the existing shareholders to sell out by cashing out, by selling secondary shares as well.
And obviously, the SPAC vehicle seeks to buy at least a majority of the company, correct?
ANDY TAI 13:29
A SPAC vehicle is a full acquisition. So the company is fully merged into the SPAC. To your question: does the SPAC itself, which includes the SPAC sponsor shares, and the SPAC investor shares, control a majority? That's actually not a key requirement. A lot of times we have seen for de-SPAC'ing, or merger process, the target company actually controls a majority of the shares as well.
Understood. Andy, what are the key considerations for selling to the SPAC if I'm an entrepreneur and have built my company?
ANDY TAI 14:06
As entrepreneurs think about selling to a SPAC, I think the first thing they have to realize is that a SPAC is not always a homerun, 100% certainty of closing type of deal. There are still some deal risks in the sense that shareholders still need to vote to approve the transaction. And if the SPAC shareholders want to reject the transaction itself, what they tend to do is actually redeem their money from the SPAC. In that case, the merger may actually go through, but the target company may actually be getting less money than what they thought they would be getting. There is also a cost of capital for selling to a SPAC, which tends to be slightly higher versus an IPO, and that's due to the sponsor promote, the warrants that need to be issued to the SPAC investors. And so entrepreneurs need to think about what the actual cost is from a dilution standpoint as well. I would also highlight that when SPAC's are formed in the beginning, it's a very highly concentrated financial investor base. So that means that immediately after closing, liquidity will be very low. And over time, the target company or entrepreneurs need to actually build a relationship with institutional and long only investors to diversify the shareholder base and increase liquidity. So that's a lot of work. And also companies need to deal with the shareholder churn and rotation over time. The last thing I'll add is SPAC's tend to have a negative perception in the market, which we think is unfortunate. At Goldman, as a firm we don't think that selling to a SPAC is necessarily a bad thing. But entrepreneurs need to be cognizant that historically, there has been a negative perception of selling to a SPAC.
Let's look at the other side of that coin. My question is therefore: what common traits do you see across those teams that are raising the most successful SPAC's? What attributes, if I'm an entrepreneur, am I looking forward to avoid building further the stereotype that some SPAC's, or going through the SPAC process, is not desirable?
ANDY TAI 16:11
To take a step back, we have to bear in mind that when SPAC's are created, there is no target company in mind. The SPAC investors are not really investing per se in a target company, but really the credibility or reputation of the SPAC sponsor. Hence, I think the most important thing to sell or create successful SPAC's is really: who the management and SPAC sponsor is. To the extent that they are seasoned financial investors or experienced executives with very strong and reputable names. I think that's ultimately the most important thing.
Now Andy, the one trigger event that has led to a surge of interest in SPAC's here in Southeast Asia is the announcement of the filing for IPO of Bridgetown Holdings. Bridgetown Holdings is a SPAC formed recently by Peter Thiel's Thiel Capital, and Pacific Century. Hong Kong-based Bridgetown "plans on targeting a company in Southeast Asia with operations or perspective operations in the technology, financial services or media sectors." What do you know of this specific initiative? And what does it mean for the future of SPAC's in Southeast Asia?
ANDY TAI 17:20
Similar to what you said, it's very focused on Southeast Asia, which is a good sign, and fairly large as I understand it. It's a $500 million SPAC. It's a good indication that as the global investor base thinks about up-and-coming regions to invest in, Southeast Asia is top-of-mind.
Andy, are there any other recently announced SPAC's that have a Southeast Asia focus?
ANDY TAI 17:43
There have historically been SPAC's with a Southeast Asia focus. I think they're just generally much smaller than Bridgetown. Hence, we don't hear about them. One example I would give is a SPAC called SC Health, which is a healthcare-focused SPAC that is led by SINCap based in Singapore. A lot of SPAC's have a global mandate. So you could think about those as also including a Southeast Asia focus as well. There is quite a number of SPAC's with a Southeast Asia focus. It is just that it is embedded within the global mandate that they talk about.
Gotcha. Now hopefully, the entrepreneurs in the audience are listening closely to this next question. What specific attributes or qualities would a SPAC seek in a startup in Indonesia?
ANDY TAI 18:31
Right. I think there is a very important question, Alan. And I think that's where we spend most of our time with entrepreneurs as well. To set the context, I think entrepreneurs need to remember that, after the SPAC merger, after the de-SPAC'ing process, the target company trades, like any regular, publicly listed company. And so if that's the end-game, a lot of times we see that the key requirements for a SPAC are similar to a company going public. So from a fundamental standpoint, what are those things? One is naturally a strong growth prospect. Two is their path to profitability. I think at the time of a SPAC acquisition, companies don't need to be profitable, but they need to be able to demonstrate to the sponsor and the public community that they can get to profitability. The third thing is significant scale as well. As we talked about previously, to be listed in the US, significant scale tends to be a market cap of above $1 billion for an IPO. And I think that is still relevant to a SPAC as well. And the last thing I would say is what's also very important is when you get acquired by a SPAC, and you become a publicly listed company in the US, the "internal plumbing" around internal controls and accounting needs to be very strong as well as any regular IPO. I think SPAC's ultimately will judge whether a merger can be done, and if the company has very strong internal controls and is able to actually be a public company by reporting on a timely basis, its financial accounts.
So I assume a big part of the SPAC's diligence of a target is: "how capable are you of reporting results? Can you conform to Generally Accepted Accounting Principles (GAAP), etc?"
ANDY TAI 20:21
Gotcha. I have another question. Do you feel that there's a specific valuation range for which is a SPAC is appropriate?
ANDY TAI 20:29
The minimum valuation range should be $1 billion market cap and above, but there is no limit on what the higher range of the market cap is. I think what's actually important as people think about the SPAC is the size of dollars in the SPAC. And it's important that the amount of money target companies are taking from the SPAC is able to fund their business for their near term cash needs as well as, ideally, up to profitability.
Now, again, this is another question that you've answered in bits-and-bats earlier: anything else you would want to add to the question: "What does the Indonesian entrepreneur need to evaluate thoroughly in considering working with a SPAC?"
ANDY TAI 21:11
The entrepreneur needs to think about what the key items are. The most important I would say is, they have to bear in mind that the SPAC sponsor or management still maintains an ongoing relationship in the newly formed company. A lot of times, the SPAC sponsor becomes the chairman of the SPAC, for example. And so the entrepreneur needs to make sure that there is strategic alignment. The tech entrepreneur needs to make sure they can actually work well on an ongoing basis with the SPAC sponsor over the long term. I think that's the most important. Number two: what they have to bear in mind is the cost of capital and whether it makes sense to sell to a SPAC, versus waiting for an IPO. But in some cases, people prefer the certainty and speed-to-market. That makes sense as well. The last thing I would say specific to Indonesia: the reality is that there are benefits for SPAC, especially when there is a limited publicly traded comp universe in the US. For the benefit of the audience, the only pure Indonesian company that's traded in the US is actually an ADR by Telkom Indonesia. And that is dual-listed. Telkom Indonesia obviously has a listing in Indonesia as well. But aside from that stock in the US, there isn't any pure Indonesian listing in the US. And so working with a SPAC in some ways is maybe helpful, because you have the sponsor there to help you market and educate the US investor base around how Indonesia looks. I think a lot of entrepreneurs don't really quite comprehend this because they live and breathe Indonesia, and they may underestimate the misalignment between public investors and the Indonesian tech companies.
Now Andy, most of my questions up until now have been largely focused on the individuals creating the SPAC, and the entrepreneur with whom they talk about acquiring the company and de-SPAC'ing and listing etc. A question for the rest of the ecosystem: as for instance you know, Andy, I spent most of my career supporting the traditional IPO processes of dozens of Chinese internet and ecommerce companies. As someone advising a number of leading Southeast Asian tech companies today in their own eventual paths to IPO, how should someone like myself modify the forms of support that I offer if we're instead talking about a SPAC instead of an IPO?
ANDY TAI 23:36
Well, Alan, I wouldn't modify it too much. Because ultimately, what you're doing now is guiding a lot of companies on how they should think about being a publicly listed company which, like I mentioned before, is the end goal for selling to a SPAC anyway. The key value that I think you would add as well is, in terms of selling to a SPAC, the process may be slightly different because this is a merger process and there are technical nuances about getting a shareholder vote, as well as how the circular is drafted. But aside from that, a lot of times the process is very similar actually to an IPO. The other support I would think about is in the target companies. Entrepreneurs are "getting in bed" with a sponsor, which is very different from the IPO process, because you don't add new executives into the framework. And so, I think about the support that you offer is helping entrepreneurs understand in the context of going public how the SPAC founders and management will and can play a role side-by-side with entrepreneurs. And I think that will be very helpful.
Very interesting. That's a lot of very useful color. Let's go back to the founder, Andy. If I am a founder that has been supported from seed stage by reputable VC's, and then I get an offer from a SPAC, what happens to those preexisting relationships with the VC's and angel investors that I've cultivated?
ANDY TAI 25:00
It's really up to the VCs to think about how involved they want to be in a publicly listed company at that point. A lot of times we see VC's taking a step back once a company goes public because their exit venue has been set up. That said, if VC's actually want to maintain a more hands-on role post-listing, or post going public, I think that's where your expertise comes in Alan, in terms of making sure there is a framework for governance between the target entrepreneur, the SPAC sponsor, as well as VC's who may want to play a role going forward.
Super useful. Now Andy, as you've mentioned, SPAC's have been around for a while and up until recently have been perceived to be nearly an exclusively US phenomenon. So what might get, "lost in translation", or in other words, what might be unsuitable in applying this structure to a market such as Indonesia?
ANDY TAI 25:58
I don't really think per se that there is any "lost in translation" or unsuitable negatives for applying this in Asia. Tech entrepreneurs should not be thinking of selling to a SPAC as an easier route than an IPO. The reality is, as you go through the SPAC marketing process, as you go through the de-SPAC'ing process, entrepreneurs still need to do a lot of work to educate the US investor base around what Indonesia is, how exciting the target company is, and selling them on the growth prospects and path to profitability in the future. And so there is not really per se a "lost in translation: or negative issue around that. But there's just a lot more work if the entrepreneurs actually want to sell to a SPAC.
Andy, are there any major regulatory issues that you have uncovered in executing a SPAC transaction with a company based in Indonesia?
ANDY TAI 26:57
We haven't encountered any issues per se. I would say when Indonesian companies think about selling to a SPAC, the usual considerations in a lot of M&A situations apply. So what do I mean by that? Structuring the shares in the US: if the target companies are domiciled in Indonesia, you need to sell in a depository receipt format in the US. That's one. Two is similar to that. In Indonesia, there are a lot of tax considerations for companies when they go public, founder tax, reduction in corporate taxes when they list on the IDX, for example. So there are a lot of tax considerations as well. And the last thing entrepreneurs need to be cognizant about, specifically in Indonesia, is a lot of times in some of the tech industries, they are regulated and there is a foreign ownership cap. It's a gray area. That is something that entrepreneurship think about as well, in terms of key considerations.
And what might be the trickiest parts of concluding a successful SPAC? Is it negotiating with current investors? Is it getting the books in order? Are there other challenges?
ANDY TAI 28:03
It's not one challenge, per se, but a combination of all the things that you talked about, which is really making sure that tech entrepreneurs know what the SPAC merger process is, and how a SPAC should be run after this de-SPAC'ing. Not a lot of people remember this case study, but there has been actually a precedence of a US SPAC acquiring a Southeast Asia company. The case study is a SPAC called Draper Oakwood Technology that acquired a Singapore-based tech company called Reebonz a couple years ago. That is a case study in terms of a SPAC doing a successful acquisition of a Southeast Asia tech company. But after the de-SPAC'ing process, there were a bunch of technical issues that had nothing to do with the operations of Reebonz per se. But Reebonz ultimately had to be delisted because of certain technical considerations from the SPAC merger and listing process.
And it's your belief that we have collectively learned enough from that to avoid repeating a lot of the technicalities, you mentioned?
ANDY TAI 29:09
Andy, to this day, we have only one US-listed Southeast Asian tech company, being Sea Group. Do you envision SPAC's enabling the listing of a few or several Indonesian or Southeast Asian tech companies over the next three to five years? Or, given the relative novelty of the SPAC in our context, should we consider a much longer timeline?
ANDY TAI 29:32
Alan, there are two parts to your question. On the first one, I think we should all be prepared to see SPAC's doing acquisitions in Southeast Asia. We talked about Bridgetown. There will be I think a bunch of SPAC acquisitions in Southeast Asia, which I think is a good sign of the maturity and sophistication of our market. That said, a lot of tech entrepreneurs should, from a mental preparation standpoint, think about really taking a step back and getting their company ready for going public as a general term. It could be both IPOs, as well as a SPAC process. What I'm trying to cautiously highlight is basically entrepreneurs should just think about when the company can go public, and use the IPO process as a baseline. If a SPAC comes along, it accelerates the process of going public. But entrepreneurs should not 100% bank on getting acquired by a SPAC. They could also still ultimately go regular IPO as well to become a publicly listed company.
Got you. Andy, it was great to have you join us again. I'm hopeful that this podcast, as did your first appearance, assists the Indonesian technology ecosystem to better understand what paths to IPO we have before us. We very much appreciate you joining us today.
ANDY TAI 30:51
Thank you, Alan. It is always good to be here.
The podcast was translated from English to Bahasa Indonesia by Alpha JWC Ventures. Terima kasih untuk mendengarkan. Sampai jumpa lagi!.