Novo Tellus Alpha Acquisition ("NTAA")

Novo Tellus Alpha Acquisition ("NTAA") is offering 10m Units for a SPAC IPO, comprising 9.5m Placement Units and 0.5m Public Offer. The offer will close on 25 Jan at 12 noon and be listed on 27 Jan 2022 at 9am. This will be the 3rd SPAC listing after VTAC (by Vertex) and Pegasus Asia.

 
Investment Summary and Key Terms

Similar to VTAC, NTAA made full use of the gatefolds to explain its value proposition to investors. Unlike the first two SPACs, the Sponsor is actually a PE Fund - Novo Tellus PE Fund 2 L.P. and under this construct, the NTAA will be one of the Sponsor's portfolio company, thereby eliminating any potential conflict of interest between the Sponsor and NTAA.

The key terms are summarised for your information below.



Reputable Sponsor with a proven track record

Novo Tellus is a leading manager with a proprietary deal flows and a clear and repeated track record of successful investments in technology and industrial companies. It has successfully invested in 4 SGX listed companies - AEM Holdings, ISDN Holdings, Procurri and Grand Venture Technology. The prospectus spoke at length about AEM, ISDN and Grand Venture but was pretty silent on Procurri, understandable given the muted performance of its share price.

What I like about the Sponsor (or its Manager) was the track record on SGX. Our local market had been challenging for PE managers and many had chosen to list their companies elsewhere. It is good to see Novo Tellus establishing such track record on SGX, except that I will point out some slight nuance



SGX Track Record shows that Manager is able to create value post listing

For me, among the first 3 SPACs, only Novo Tellus has the most relevant experience with SGX listed companies. They were able to grow the market cap post its listing and the value creation playbook is absolutely critical for SPAC investors in the long run. It is easy to find a target to acquire but not easy for the the manager to make sure the share price move in the right direction. The share price can only move up if the revenue or EBITDA grows over time as well.



Acquisition Mandate

The Sponsor intends to acquire a company in the Indo-Pacific region (basically meaning Asia Pacific) and it must fit into the Technology or Industrial Sector with strong macro tailwinds.



Cornerstone Investors-

13 Cornerstone investors have subscribed for 16m units amounting to $80m. The cornerstone investors included Affin Hwang Asset Management Berhad, Venezio Investements (i.e. Temasek Holdings), Asdew, Fortress, Heritas and Target Asset Management. I would rate the list of cornerstone investors very highly.

Management Team

The CVs of the trio of Loke Wai San, Keith Toh and Irwin Lim are impressive. They had worked at reputable PE/VC firms and have many years of investing experience in the private equity space.

What is unique about this SPAC versus the first two SPACs

It is important to note that the SPAC is actually a portfolio company within a private equity fund - Novo Tellus PE Fund 2, L.P. ("PE Fund 2"). 

In other words, the PE Fund 2 created a SPAC and then list the SPAC. The promote that is earned by the SPAC, will also form part of the returns to investors in the PE Fund 2 and if PE Fund 2 performs well, the manager will then get its "carry interest" there. This helps aligns the investors in the Fund with the investors in the SPAC as the manager only need to maximise the returns from this SPAC, and it will benefit both set of investors.

Side note - PE Fund 2 has a fund size of around US$250m and usually for portfolio construction, will have around 8 to 12 companies.  

Time Horizon is different between PE Fund 2 and SPAC investors

It is important to note that the investment horizon between that of SPAC investors and that of the PE Fund 2 is different. Here is the reason why.

A PE Fund usually have a limited life (say 10 years) and within that time frame, the manager will like to generate a return that is more than 2x, usually within a 5 year hold and high teens IRR for its investors (or Limited Partners). On the other hand, the shareholders of the listed SPAC in theory, has an "unlimited" investment horizon.

Using AEM as an example (see chart below) - the Fund invested between 2011 and 2012 and exited between 2017 and 2018. It has to exit the Company even if the fundamentals are good because of the PE Fund has a fixed term. In this example, it works out well for the public investors as the share price continued to perform post Novo Tellus's exit.

Two takeaways to note - (1) share price may come under pressure when PE Fund 2 needs to exit from NTAA and (2) the share price may not perform post Novo Tellus exit as they are no longer incentivized to create value at the NTAA level and much will depend on the management put in place then. Of course AEM Holdings helped allay some concerns given the share price continued to surge post Novo Tellus's exit.

SPACs are not intended for short term flip

If you have observed the share price of VTAC and Pegasus Asia, you will know by now that it is not intended for investors to "flip" the IPO on day 1. As such my chilli ratings are meaningless here. 

Having said that, the chilli ratings do reflect what I feel is the quality of the Sponsor.

Mr IPO Chilli Ratings

Among the 3 SPACs that is listed in January, I would rate NTAA at the top (3 Chillis) for a few reasons:

• Strong alignment of Interest - This is the most important criteria. NTAA is fully aligned with PE Fund 2 investment objectives. NTAA needs to deliver so that PE Fund 2 can generate the returns to its investors. VTAC or Pegasus Asia don't have this added responsibility and they can just "hit and run" as only a small portion of the promote is at risk whereas if NTAA doesn't perform, it is going to affect PE Fund 2 returns and consequently Novo Tellus ability to earn carry interest from that fund and affects its ability to raise subsequent PE Funds. The size of PE Fund 1 is around $25m while PE Fund 2 is $250m

• Proven value creation track record on SGX - Let's face it, getting SGX listed companies to perform post listing is damn hard and they have already showed you 3 out of 4 cases that they can do it. You don't see similar or relevant track records from the other 2 SPACs cos they don't have them here. They may have the track record elsewhere

• Management team investment skillsets - For those not in the PE space, you may not know the subtle nuances. The investment styles among the 3 management teams cannot be more stark. Vertex is more of a venture capital set up, meaning they are more used to a shot gun approach whereby they invest small amount in many start ups and then follow on investing when some of the start ups show some promises. They are usually not as hands on as the buyout managers and are more useful when the companies are much smaller. The team at Pegasus Asia team has more "sell side" experience in Europe. The team at NTAA are true blue buy-side investors in the buyout space and they are hands on and control-oriented investors. They usually with some value creation plans in place prior to acquiring any company.

• Proprietary deal flows - You need good deal flows to generate good returns and more than 90% of the deal flows at Novo Tellus is proprietary. The other two SPACs didn't furnish this or highlight it as their unique selling points.

So here you go, I hope it gives you better clarity on why I prefer NTA over the other two SPACs. In any case, I will not be participating as the chances of getting the shares are low but good luck to those who are trying!

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