Has Asia missed the blank-cheque boat? The SPACs frenzy is cooling before Hong Kong, Singapore even get off the starting blocks

With tens of billions of dollars in new listings at stake, Hong Kong's Financial Secretary Paul Chan Mo-po directed the city's securities regulator and bourse operator in March to study the feasibility for amending rules to let special purpose acquisition companies (SPACs) raise funds in the city.

Singapore expects to open its arms to SPACs by midyear, and excited deal advisers are fielding enquiries from hoards of Asian companies looking for a faster and easier way to raise capital from investors in the public market.

That momentum may come to a grinding halt after SPAC fundraising slowed to just US$3.6 billion in April, the lowest amount in a month since June last year, according to financial data provider Refinitiv.

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Calls for a watered-down SPAC framework from traditionally risk-averse regulators in Hong Kong and Singapore are gaining a wider audience. The conservative camp is keen to enact rules that weed out the weakest companies seeking a public listing and offer greater protection to retail investors.

The declining IPOs of SPACs, particularly in the United States, may be the sign that Asian markets have missed the boat with the latest and hottest buzzword in global finance. Blank-cheque companies, as SPACs are also known, have already raised nearly US$100 billion globally in the first three months of the year, with the vast majority of listings on American bourses.

"Companies from Hong Kong, Asia and China were two years behind the US [in terms of SPACs]. It was not until last year they showed interest," Jason Wong, a SPAC sponsor and partner at Whiz Partners Asia, the Asian affiliate of Japan's Whiz Partners. "The trend will continue."

Asia's conservative and more restrictive approach to SPACs is likely to severely crimp deals, said Wong, a pioneer in orchestrating Asia SPAC listings, including the creation of DT Asia, the first US-listed Asia SPAC in 2014. He has helped to list four SPACs, including Hong Kong-based Ace Global Business Acquisition, on the Nasdaq in April.

SPACs have existed as an investment vehicle since the 1990s, but rose to prominence in the past year as central banks pumped liquidity into markets to stimulate growth as the coronavirus pandemic weighed on economies around the world.

Deal volumes are collapsing in the US after the US Securities & Exchange Commission (SEC) raised questions about how SPACs account for stock warrants in deals, and media reports indicated the regulator is considering guidance to rein in SPACs' optimistic future growth projections.

Another reason for the slump: the eye-popping amount of money raised by the vehicles in such a short period of time, including by a handful of Hong Kong's tycoons seeking their own blank-cheque deals in the US.

"Even if it weren't for the SEC statements on SPACs, there was going to have to be a pause," said Marcia Ellis, global chair of the private equity group at law firm Morrison & Foerster. "It's generally the same hedge funds that are investing in SPAC listings, and as far as the [private investment in public equity] PIPEs are concerned, it is generally the same group of asset managers that are investing in many of these...They just need to digest what they've invested."

The frantic pace of fundraising by SPAC sponsors has raised concerns among some investors about the sheer quantum of capital that needs to be deployed by these companies and whether it could cause valuations to balloon in Asia and elsewhere.

SPACs typically are required to engage in a merger - known as a de-SPAC - within two years of their listing, failing which they are forced to give the money back to investors.

Berkshire Hathaway chairman Warren Buffett (centre) said the vast amount of capital being deployed by SPACs could limit the value investor's ability to make deals. Photo: Reuters alt=Berkshire Hathaway chairman Warren Buffett (centre) said the vast amount of capital being deployed by SPACs could limit the value investor's ability to make deals. Photo: Reuters

The blank-check companies have about US$129 billion of capital that they need to deploy in the next few years, according to Goldman Sachs. That could create as much as US$900 billion in enterprise value via mergers and acquisitions over the next 24 months, Goldman analyst David Kostin said in an April 21 note.

Warren Buffett has called SPACs a "killer" and said the amount of capital facing a time limit to be deployed is likely to make it difficult for Berkshire Hathaway to be competitive for acquisitions.

Hong Kong-based deal advisers say they are fielding a barrage of enquiries from entrepreneurs looking to raise capital and the prestige of running a publicly listed company. The potential blue-chip companies among them are still likely to find their way onto the main boards of Hong Kong and Singapore's exchanges, as well as find targets at reasonable valuations.

"Asia is in better shape as Asian sponsors haven't raised the same quantum of capital that has been raised in the US," said Harish Raman, head of Citigroup's Asia-Pacific equity capital markets syndication team. "The number of Asian sponsors looking at Asian targets remains in balance, unlike in the US."

There are 426 SPACs globally seeking acquisitions, according to SPAC Analytics, a Toronto data and research firm.

That said, companies that failed to meet listing requirements in the past, or whose financial statements will not stand up to public scrutiny, may find the back-door bolted shut on their route to public listings.

There also is increasing concern among regulators and investors about the rosy projections some emerging technology companies have made ahead of their mergers with SPACs.

For example, Faraday Future, a seven-year-old electric vehicle (EV) start-up that has yet to sell a car, is projecting more than 266,000 vehicles in sales and US$21.4 billion in revenue by 2025, according to its investor presentation. The company, founded by failed Chinese tycoon Jia Yueting, agreed to go public via a SPAC in January.

"There is going to be a separation of the wheat and the chaff," said Ellis of Morrison & Foerster. "Some of those people should not have established SPACs and are going to have a hard time going forward, and doing the really hard work required to find a good target."

Financial Secretary Paul Chan Mo-po called on the city's securities regulator and bourse operator in March to study listing rules changes for SPACs. Photo: Sam Tsang alt=Financial Secretary Paul Chan Mo-po called on the city's securities regulator and bourse operator in March to study listing rules changes for SPACs. Photo: Sam Tsang

The conservative camps in Hong Kong and Singapore are unlikely to be strong enough to halt the SPAC advance in Asia entirely, given their fierce competition to be the premier fundraising hub in Asia.

There is also a compelling reason to tentatively adopt a version of the US SPAC listing regime: entrepreneurs and investors like them.

More than half of all debuts last year were by SPACs and 73 per cent of this year's IPOs on US bourses were by blank-cheque companies, according to SPAC Analytics.

Asia's financial markets are heavily dependent on a steady stream of initial public offerings - and the accompanying flow of investor capital and trading fees- to remain competitive. Since early 2020, a large percentage of investor capital has flowed into SPACs, rather than traditional IPOs in the US.

Listing SPACs in Hong Kong presents potential advantages over the US in terms of the number and market value of potential targets, said Edgar Cheung, director of investment manager Wai & Fung International Development.

"It is difficult for SPACs to acquire US unicorns now as the amount of funds raised by SPACs are much lower than the market value of those highly valued unicorns," said Cheung, who is working with the family office of Hong Kong's Tsangs Group to launch three SPACs this year. "SPACs are starting to tap into other regions, like Asia."

SPACs have been a popular listing mechanism for emerging technology companies that require a large amount of operating capital, but are not yet profitable, such as EV makers and related technology.

More than half of the companies that went public in the US via SPACs this year are in the biotech, EV, autonomous driving and renewable energy sectors.

SCMP Graphics alt=SCMP Graphics

Regulators in Hong Kong, the world's top IPO destination for seven of the past 12 years, are looking to walk a fine line between maintaining the city's relevance as an international fundraising hub and protecting the interests of retail investors.

SPACs have faced criticism for the advantages they offer sponsors and other early investors over retail shareholders.

As of Wednesday's close in New York, 38 per cent of the US-listed SPACs that have completed de-SPAC transactions since the beginning of 2020 are trading below US$10 a share, the IPO price adopted by most SPACs when they first go public.

Allowing SPACs to list in Hong Kong also could force regulators to backtrack on their efforts to restrict back-door listings and shell companies in the city, some advisers say.

Hong Kong officials have not provided an update on the status of their study. Regulators will "consult the market in due course" after the review is completed, a spokesman for the Financial Services and the Treasury Bureau said response to a query by South China Morning Post.

Singapore regulators hope to put a framework in place for SPACs to list in the city later this year. Photo: AP alt=Singapore regulators hope to put a framework in place for SPACs to list in the city later this year. Photo: AP

Singapore is exploring its own framework for SPACs, resuscitating the plan from its public consultation a decade ago. Singapore Exchange Regulation (SGX RegCo), an arm of the city's bourse, proposed to give SPACs a longer period to complete deals, subject to a minimum market capitalisation of S$300 million (US$225 million), higher than the US. Sponsors also would have to hold onto their shares longer after a merger.

A public consultation on the proposal wrapped up on April 28 and Singapore regulators hope to have a framework in place by the middle of this year.

That focus on measures to protect retail investors has raised concerns among some investors about whether SPAC listings on Asian bourses will succeed.

Compared to the US regulations, Singapore's proposal focuses more on risk prevention and protection of investors' interests, said Whiz Partners' Wong. "The [rules] may be too restrictive," and ultimately deter SPAC listings in Singapore and Hong Kong.

Additional reporting by Peggy Sito

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.