How risky is a blank cheque investment?

If Zoomcar seals this listing, it will follow the likes of Yatra Online and ReNew Power in taking the SPAC route. Photo: Mint
If Zoomcar seals this listing, it will follow the likes of Yatra Online and ReNew Power in taking the SPAC route. Photo: Mint

Summary

  • Indian exchanges don’t allow SPACs yet, though the capital market regulator is considering them. But Indian investors can invest in global SPACs.

Earlier this month, India-headquartered car-sharing company Zoomcar drove closer to listing its shares on American stock exchange Nasdaq. The less-common route it is taking is to merge itself into a listed company that had no underlying business but had raised funds explicitly to facilitate such an arrangement. Such a listed company is known as a special purpose acquisition company (SPAC), also a ‘blank-cheque company’. If Zoomcar seals this listing, it will follow the likes of Yatra Online and ReNew Power in taking the SPAC route..

In the US, where all the SPAC action is, this route was a rage when the stock market was surging, but not anymore. Indian exchanges don’t allow SPACs yet, though the capital market regulator is considering them. But Indian investors can invest in global SPACs at two points: when the SPAC makes an IPO and after a business is merged into it. In the first instance, investors are essentially backing the SPAC promoter on their ability to attract a good business. In the second instance, they are buying into that business.

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SPACs are a high-risk investment, riskier than even the IPOs of internet businesses. The traditional IPO route, taken by the likes of Zomato and Paytm, sets filters for businesses and requires them to make far more disclosures. The SPAC route is, in spirit, a private transaction between two parties—and, thus, higher up on the risk scale. The Yatra stock is down 77% over its December 2016 price and ReNew Power is down 47% from its January 2021 price.

Risky business

The SPAC route has been used by businesses that had reached a level of maturity and their private investors sought exits, like Southeast Asian superapp Grab and American biotech company Gingko Bioworks. But in 2020 and 2021, when capital was abundant and the stock market was galloping, more businesses sought out SPACs and quality fell. Younger companies yet to demonstrate profitability, leave alone sustained profitability, also took the SPAC route.

The subsequent market correction hurt SPACs. The risks inherent to SPACs are captured by three indices tracked by PitchBook, which curates data on private companies. These three indices track the performance of three sets of companies that transited from private to public: those backed by venture capital (typically, they invest early), those backed by private equity (typically, they come in later) and companies that listed via a SPAC. Across all four designated time frames, the SPAC set has fared the worst.

Indian overtures

Previously, prominent Indian startups like Grofers, Byju’s and Flipkart have reportedly considered the SPAC route to list in the US. Similarly, SPACs have also drawn interest from Indian investors of scale. For example, in June 2021, a SPAC called Global Consumer Acquisition Corp floated by private equity professional Rohan Ajila and Manipal Group chairman Gautham Pai raised $170 million through an IPO. It recently filed papers with the US regulator for a meeting next month relating to two acquisitions.

Eventually, for retail investors subscribing to a SPAC, returns depend on how the business that is absorbed fares. Given that SPACs are largely combining with Internet startups, it is instructive to see how four prominent Indian Internet businesses that have taken the traditional IPO route in the past 15 months have fared. All four trail the bellwether BSE Sensex, and three of them trade below their issue price. If anything, the downside in Internet businesses via SPACs is only greater.

SPAC slowdown

As the first chart shows, about $245 billion was raised by 861 SPACs via IPOs in 2020 and 2021. A lot of this is yet to be deployed, and time is running out. SPACs, typically, say they will acquire a business within 18-24 months, or return the money to investors. With market sentiment poor, it’s taking longer to close deals. Only 49 SPAC deals closed in the first half of 2022, against 128 in the first half of 2021.

There are 530 SPACs looking to make acquisitions, according to SPACinsider, a provider of SPAC data. In its September market review, SPAC data platform Boardroom Alpha said: “While liquidations are already on the rise, today’s levels surely won’t hold a candle to what we have coming in 2023, with ~270+ SPACs set to expire within the first 3 months of the year." It also underlines why SPAC investing is a high risk proposition.

www.howindialives.com is a database and search engine for public data.

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