SPACs may reshape Gulf financial markets

Last week, Abu Dhabi’s stock exchange, known as ADX, introduced its first SPAC framework, paving the way for these types of firms to launch on the bourse. (Reuters/File)
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  • Blank check companies allow for diversification, says former DIFC chief economist

RIYADH: SPACs may reshape Gulf financial markets, bringing together savvy investors and disruptive startups.

Last week, Abu Dhabi’s stock exchange, known as ADX, introduced its first SPAC framework, paving the way for these types of firms to launch on the bourse.

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 backers may not necessarily know the name of a specifically targeted firm, just general areas the acquisition company is interested in buying into.

“SPACs also allow for diversification in listed sectors, which are too concentrated on banks, real estate, and telecoms,” former chief economist of the DIFC business district Nasser Saidi told Arab News. “They will bring support for startups, especially those in disruptive sectors and later-stage growth companies.

“Target companies will certainly include promising technology ones, financial technology firms, the media industry, and health and education, as well as renewable energy and clean tech.”

Driven by strong liquidity and high technology sector growth, SPACs have boomed recently. There were 613 listings around the world totaling $145 billion in 2021, compared to $80 billion for 247 SPACs the year before, according to figures from the consultancy Nasser Saidi & Associates.

These vehicles generally have around two years to find an acquisition target, or face being wound up and returning money to investors.

Being bought by a SPAC can be an easier way for a private company to go public, as disclosure rules are more relaxed.

Yet, SPACs are not without problems. The US Securities and Exchange Commission said last December it was poised to tighten the scrutiny around these firms after launching several investigations into these listings.

SEC chair Gary Gensler said in a speech that, in some SPAC launches, there was “inconsistent and differential disclosure” among the various parties.

“Currently, I believe the investing public may not be getting like protections between traditional IPOs and SPACs.”

The SEC is exploring whether fee structures incentivize bank underwriters on SPAC listings to push ahead with unsuitable deals and then, at a later stage, the same bank may act as an adviser recommending the deal to unsuspecting investors.

The Dubai Financial Services Authority, the market regulator of the DIFC, has issued guidelines for listing SPACs to mitigate some of these risks. As an example, the listing of each investment vehicle will be considered on a case-by-case basis. It will also require it to ring-fence proceeds raised from investors.

Another problem is that, often, SPAC cash can spend a long time looking for a home.

“If you look at the 2021 cycle, 82 percent of 2021 SPACs are still searching for deals and only 3 percent of the SPACs realized their deals,” Saidi added.

SPACs also face a shifting financial environment as central banks tighten global monetary policies to battle inflation.

The fact that regional economies will profit from spiking oil prices does not necessarily mean that this cash will be injected into SPACs, but instead be used to buy into government initial public offerings, Saidi pointed out.

“The process in Gulf Cooperation Council countries will be more institutionalized, given that regulatory frameworks will look at the US example and avoid mistakes that were done there.”

This has not eaten into the regional appetite for SPACs.

Last July, Shuaa Capital said it planned to set up three SPACs, with $200 million in capital. Mubadala Capital unveiled a $200m blank check company 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 the Abu Dhabi sovereign wealth fund, the Abu Dhabi Investment Authority, agreed to go public through a SPAC deal with the NextGen Acquisition Corp. II, which floated earlier this month with a $3.2 billion valuation.

Also, Saudi Tadawul CEO Khalid Al-Hussan said last December, that the stock exchange was considering whether to allow SPACs to list along with 50 IPOs in its pipeline.

Saidi said: “SPACs’ future remains promising because the region has many young dynamic companies. SPACs will fill the gap, given the under-developed venture capital and private equity sector in the region.”