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Published: 12:06, August 02, 2021
Tapping into the SPAC phenomenon
By Oswald Chan
Published:12:06, August 02, 2021 By Oswald Chan

Special purpose acquisition companies — entities formed to raise funds for acquiring companies, from investors who have no idea what the acquisition targets might be — are making a splash in the IPO market.

Since the start of this year, up to 341 IPOs involving SPACs have been launched worldwide, raising a record US$100 billion as of May 19 — 23 percent more than the figure for the whole of 2020 — with US-listed SPACs dominating the marketplace, according to financial market information provider Refinitiv.

SPACs have been responsible for bringing some of the hottest stocks to market this year, including online betting firm DraftKings, billionaire investor Richard Branson’s space-tourism company Virgin Galactic Holdings, and electric- and hydrogen-powered vehicles venture Nikola.

Several prominent Hong Kong magnates, including Li Ka-shing and son Richard Li Tzar-kai, former financial secretary and Blackstone executive Antony Leung Kam-chung, and New World Development’s Adrian Cheng Chi-kong, have jumped on the SPAC bandwagon, convinced of the exponential investment returns as ultra-low interest rates in the global financial market drive massive capital into this risk-asset class.

Raghu Narain, Asia Pacific head of investment banking at French investment bank Natixis, listed three factors behind the popularity of SPAC listings — ample liquidity in the financial market; market volatility that creates a price risk for traditional IPOs; and a pool of technology, “environmental, social, governance”-related and healthcare companies that can be acquired for growth capital.

In Asia, only South Korea and Malaysia currently allow SPAC listings, while the trend is flourishing in the United States.

As Hong Kong and Singapore attract a rich pool of new-economy and private technology companies in the Chinese mainland and in Southeast Asia to complete de-SPACing transactions, it raises the question of whether these Asian financial hubs should jump on the bandwagon. Both have sound stock markets, a strong base for institutional investors and sponsors, and ample market liquidity.

The de-SPACing process involves SPACs negotiating mergers and acquisitions so that targeted companies can obtain financing and go public.

Hong Kong Exchanges and Clearing — the city’s bourse operator — said in June it will start consultations on changing its rules in the third quarter to allow locally listed SPACs.

International law firm Mayer Brown expects competition between Hong Kong and Singapore as they target the same Chinese mainland and Southeast Asia firms.

“Hong Kong should develop a SPAC listing regime as it will boost capital market development and allow private companies to get listed easily,” said Edgar Cheung, senior portfolio manager at Hong Kong-based family office Tsangs Group.

Regulatory issues

“Even if Hong Kong were to start a SPAC listing regime this year, billionaires may allocate some of their capital for SPACs listed in Singapore. The Lion City’s financial regulators focus on making deals, while Hong Kong is more concerned with regulations. Hong Kong’s financial regulators may not be flexible enough in SPAC listings,” Cheung explained.

Narain said if Hong Kong and Singapore allow SPAC listings, there will be an “Asian ecosystem” of SPAC sponsors, institutional investors in SPAC IPOs, and corporations or target companies seeking to merge with SPACs in Asia, as opposed to the current situation, with most SPAC IPOs taking place in New York.

Hong Kong, one of the world’s top IPO destinations alongside New York and Shanghai, and which has raised far more funds than Singapore, still prefers the traditional IPO route. The special administrative region has tightened rules on backdoor listings and shell-company activities to curb insider trading, stock price manipulation, and unnecessary share volatility.

Moreover, Hong Kong regulators have been simplifying listing procedures and requirements, including allowing pre-revenue biotech companies to list on HKEX’s main board, making companies less keen on the SPAC route.

Singapore, already with a recent string of company delistings and trailing well behind Hong Kong in IPO fundraising, is being more proactive. The Singapore Exchange has begun market consultations on introducing SPAC listing regulations, hoping SPAC listings could provide another attractive option to rekindle the Lion City’s sluggish IPO market.

Experts say Hong Kong should strike a balance between allowing flexibility in SPAC listings and having oversight in the quality of a SPAC’s targeted business.

“For Hong Kong, the current regulatory approach towards shell companies will impede efforts to launch and promote the city as a SPAC listing venue. The Securities and Futures Commission and HKEX will require the acquisition of such target companies by shell companies to go through a new listing vetting process similar to that of the normal listing route,” said Mayer Brown Corporate and Securities Partner Billy Au.

“I think Singapore will be more successful, especially if Hong Kong takes the same regulatory approach regarding de-SPACing activities as it does for current backdoor listing activities. If both cities’ SPAC listing regulatory frameworks are similar, I believe Hong Kong will see a greater number of SPAC listings, de-SPACing activities and fundraising exercises, as the number of de-SPACing targets headquartered on the mainland and doing business there is likely to be much more than those in Southeast Asia,” Au reckoned.

Narain added: “The context of that merger framework for de-SPACing or business combination would depend on the requirements of Singapore or Hong Kong. But by providing an extensible framework … the ability to create a vibrant ecosystem is possible.”

Other analysts prefer to play it safe. “The US SPAC regime cannot be directly cloned to Hong Kong without tailoring,” noted Louis Lau, KPMG China capital markets advisory group partner. “While it is important to retain the merits of SPAC listing, careful consideration is required when setting the rules to prevent companies from getting listed which could, in effect, be circumventing existing listing rules,” he said.

“Save for setting a list of criteria for gauging the experience and track records of SPAC sponsors, regulators may consider introducing measures to promote a better alignment of interests between SPAC sponsors and investors by tying their economic interests to post-merger growth and the performance of target companies,” Lau said.

Natixis Asia Pacific Head of Mergers and Acquisitions Miranda Zhao said “the potential new Hong Kong SPAC listing regime will have to take into account the city’s current IPO vetting system and its reverse takeover rules, as well as the regulator’s previous efforts to tighten rules around shell companies and backdoor listings.”

Investor protection

Zhao said a SPAC regime with a more balanced protection mechanism for all classes of investors involved in a SPAC listing and the de-SPACing process could be positive factors for SPACs to become a more sustainable and attractive tool to support corporate development.

To increase investor protection, Mayer Brown suggests that HKEX highly regulate a SPAC sponsor before and after a SPAC listing. It should identify a core group of the SPAC sponsor management team to disclose the sponsor’s respective roles and relevant experience in acquisition strategy to enable investors to make informed investment decisions.

After a SPAC listing, the core group of the SPAC sponsor management team should remain as directors of the SPAC for a stated period of time, perhaps 24 months, after the de-SPACing transaction, so that these directors will owe the SPAC their fiduciary duties under relevant company laws, such as acting in the best interests of the SPAC and its shareholders as a whole, and avoiding any conflict of interest with the SPAC.

SPACs are usually formed by billionaires, private equity firms, high-profile hedge fund managers and large-scale family offices. It is a viable method of taking companies public in a reverse merger form that provides investors, sponsors and target firms with advantages.

SPAC investors typically put money raised from selling shares into a trust account that pays interest when the listed SPAC looks for an acquisition target. If none are found over a specified period, mostly two years, investors will be paid back when the listed SPAC goes into liquidation. If a proposed acquisition becomes a valuable investment, SPAC investors can retain some upside in the company’s future performance. These features will allow SPAC investors to maximize gains when a good merger candidate emerges.

Despite its various benefits, SPAC investment may still spell certain risks for investors. SPAC acquisitions pose uncertainty, so investors can only trust the insight and capability of their sponsors. Moreover, the due diligence of the SPAC acquisition process may be far less stringent compared with traditional IPOs and may lead to fraudulent listings.

oswald@chinadailyhk.com


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