Spacfilla: can Asia replenish the blank-cheque bubble?
Sponsors of special purpose acquisition companies (Spacs) have earned impressive returns and prompted Hong Kong and Singapore to mull allowing Spac listings on their exchanges. But signs are emerging that the boom is over.
Fundraising by Spacs plunged from $34.5 billion in March to $3.9 billion in April, according to Refinitiv. In addition, the number of newly listed Spacs in the US fell from 116 in March, to just 18 in April. This came even as analysis released by Amundi Asset Management earlier this month found that Spac sponsors had earned 252% returns on average.
Investors have blamed tightening regulations in the US, price appreciation driven by short selling and promising projections, and an oversupply of Spacs currently looking for target companies to acquire, for the fall.
“The Spacs phenomenon is now reaching a tipping point,” Amundi wrote in the report.
“The resetting of market performance comes at a time of greater scrutiny from the Securities and Exchange Commission (SEC) that has already started to issue some warnings for investors... The SEC intervention is further freezing new IPOs and giving time to the overall Spac business to reassess the way forward.”
Spacs, also known as blank-cheque companies, are shell corporations listed on a stock exchange with the purpose of acquiring a private company.
While they have been around since the 1990s, when they were used in the technology, healthcare, logistics, media, retail and telecommunications industries, they came to prominence last year during the so-called “everything bubble” of 2020.
There were 310 new Spac issues in the first quarter of this year, compared to 19 a year earlier. Spacs also raised $93 billion globally in the first quarter of this year, more than the $81 billion raised for the whole of 2020, according to Refinitiv.
Spacs allow the target company – usually a tech unicorn – to go public without having to go through the traditional path of an initial public listings (IPO) or a direct listing.
Some high-profile companies that listed on the Nasdaq through the Spac route include electric vehicle battery maker QuantumScape, sports betting firm DraftKings, and Richard Branson's space-tourism business Virgin Galactic.
“We're more focused on Spacs as a newer alternative form of liquidity,” said Eric Woo, co-founder at Revere VC, a venture capital platform whose clients include single family offices in Asia and abroad.
“[The conversation has] moved from direct listings to Spacs as an even faster mechanism, and less transparent mechanism of getting a late stage, private company in the public market. So from that perspective, it's healthy, right? Because it creates some liquidity, which returns capital to shareholders, and shareholders can then redeploy that capital," he said.
There are four stages in which investors can enter a Spac deal: during the creation of the Spac (these investors are known as sponsors); during the Spac listing when common shares and warrants are issued; before a Spac acquires its target company; and after the acquisition of the company, known as the de-Spac stage.
The biggest winners have been the sponsors, who gained an average return of 252%, according to the Amundi report. However, investors who took a buy-and-hold approach before and after mergers had more modest returns of 90% and 44%, respectively.
On paper, it seems like investing early reaps the highest rewards, but Singapore-based family investor Stephen Chen points out that before a target for merger is found, "it's just speculation".
"There's no operating business yet. But if that is your game plan then, sure, you can make money on the Spac warrant itself. But if you're trying to make money on the operating business, then you pretty much have to wait for stage four after it’s merged. So until then, it is a lot of hope,” he told AsianInvestor.
While post-merger investors do reap an average 44% returns, it is 8% less compared with the Russell 2000 Growth Index, according to Amundi.
The boom drew interest from the likes of Hong Kong and Singapore regulators. Hong Kong’s financial secretary Paul Chan Mo-po in March directed the stock exchange and regulator to explore a framework to allow Spacs, while the Singapore Exchange (SGX) has opened for consultation a proposal to allow Spacs on the Singapore bourse.
Several Hong Kong tycoons have invested in Spacs, including Richard Li, who partnered up with German billionaire Peter Thiel to set up Bridgetown Holdings, a Spac that raised $595 million when it listed on the Nasdaq in October. Adrian Cheng, whose family controls New World Development and Chow Tai Fook Jewellery Group, is looking to raise $345 million in the IPO of his blank-cheque firm called Artisan Acquisition Company.
Asian companies have also been in talks to go public through Spac mergers, including southeast Asian ride-hailing tech giant Grab in the biggest Spac deal to date that valued the firm at $39.6 billion. Indonesia's e-commerce platform Tokopedia was also reportedly considering listing through a Spac merger with Li and Thiel's Bridgetown Holdings.
However, it remains to be seen whether interest in Spacs will be sustained, seeing that numbers have fallen to pre-boom numbers.
“As a permanent mechanism, I think it's going to be a little bit less interesting over time, because again, it was just sort of where people were rotating capital," Woo told AsianInvestor.
"We're already seeing a lot of the Spac volume dry up now. And then, of course, some of these ones that have been created, are having trouble finding target companies."
There are currently more than 400 Spacs with more than $140 billion held in trust on the hunt for target companies to acquire, according to Amundi.
In Singapore, consultation for the Spacs framework ended on April 28. SGX has not made public their decision or results of the consultation, but Tan Boon Gin, chief executive of SGX RegCo, the regulatory subsidiary of the bourse, said during the SGX Regulatory Symposium on May 7 that he was keen to explore further safeguards to put in place that would be suitable for the local market.
“The US experience has also revealed concerns such as excessive dilution and a rush to de-Spac. So, the challenge then for us is how to address these concerns without tilting the risk-reward balance too much,” he said during his closing remarks. “If we make too many changes to the US Spac model, is anyone going to come and use our framework?” he said.
Marcia Ellis, global chair of PE Group in Hong Kong at law firm Morrison & Foerster told a webinar on Wednesday (May 12) that it would be difficult for regulators to find the right risk-reward balance for Spacs in Singapore and Hong Kong,
“The fundamental issue with the Singapore and the Hong Kong legal regimes, is the lack of class action shareholder litigation. Without class action shareholder litigation, effectively, public shareholders have no remedy,” she said.
“So if after the de-Spac, the share price trades downward ... there’s really no remedy that's available to the shareholders. The government could come out and take an enforcement action, but the shareholders would not have a remedy for the damages to them,” she said.
Morrison & Foerster, however, are still relatively optimistic about US-Spacs based in Asia, even if interest seems to have waned in the US market.
“We’ve seen over the last year or so, the product is a product that is valued by the marketplace, valued by investors, and it's valued by target companies. I don't think that that is fundamentally changing,” said Mitchell Presser, co-chair of the corporate department in New York.
“I wouldn't write off the efforts made in other countries to create Spac markets as well. Having said that, they will likely need to structure them in a way that remains attractive to both investors and target companies, because that's what ultimately drives this market.”
From a family investor point of view, Chen said that even if Spacs are allowed in Singapore, individuals will need to do their homework, “develop critical thinking skills, educate themselves regarding the business environment, develop an awareness of the gap in principal-agent incentives, and learn to assess the integrity of the sponsor and management team.”
“No one forced them to invest in a Spac, Reit, stock, bond, or any other market instrument for that matter. They have to ask the necessary questions, learn to say no, and be prepared to walk away,” he said.
This article has been updated to clarify quotes by Morrison & Foerster.