SPACs: Beneficiaries of the bull run

SPACs don’t enjoy the best of reputations in Asia. Known as special purpose acquisition companies, or blank check companies, they appeared in the mid-2000s as financial sponsors took advantage of booming public markets to shoehorn businesses into listed entities. Most of the deals that got away before the global financial crisis intervened ended up underperforming. SPACs were duly bracketed with reverse mergers as a means of getting substandard companies to go public.

But on the back of a resurgence in the US, the structure appears to be gaining traction in Asia once again – and with recognized sponsors this time. In the past couple of months, Antony Leung, formerly Hong Kong financial secretary and Greater China chairman at The Blackstone Group, and Sing Wang, ex-head of North Asia at TPG Growth, have raised capital out of the US for China-focused SPACs. New Silk Route (NSR) founder Parag Saxena is doing the same in India.

“A SPAC is a quick way to raise money, especially in a good market. An 8-12-week timeframe from kickoff to having your money in the bank is legitimate. You get a lot of flexibility as a PE sponsor to find a target company, and it’s a fast way of listing. The target signs a merger agreement with a SPAC, there’s a shareholder vote, and it becomes a public company,” says Paul Boltz, a partner at Gibson Dunn.

From an investor perspective, it means giving money to a vehicle that has no existing business in the expectation that its primary rainmaker can delve into his networks and find one within a couple of years. This might be a palatable proposition in times of plenty, but when conditions turn, those investors – who generally aren’t the sort making long-term commitments to traditional PE funds – don’t want their capital locked up. “Everything is easier to sell in a bull market,” observes Saxena.

Willing sponsors

Energy has played a significant role in America’s SPAC revival. Share offerings by these vehicles generated $9.8 billion in 2017, the most since 2007, with about one-third raised for oil and gas exploration plays. They included $650 million for TPG Pace Energy Holdings Corp, which in March agreed to buy a portfolio of assets in Texas from EnerVest for $2.66 billion. The likes of Apollo Global Management and The Carlyle Group have also launched energy-focused SPACs.

Another sponsor category is populated by dealmakers who have left global PE firms and struck out on their own, raising capital on the back of their industry reputations. For example, Chinh Chu spent 25 years with Blackstone before launching a $600 million SPAC that acquired Fidelity & Guaranty Life for $1.84 billion in 2017. He is now reportedly working on a new vehicle to target consumer companies. For these executives, SPACs can offer a freedom far removed from a global GP.

“It’s a new lease of life for me – I can be flexible, opportunistic, and call all the shots. I don’t have to answer to a global investment committee or negotiate with five partners,” says Wang, who recently raised $220 million for TKK Symphony Acquisition, which is expected to target consumer and lifestyle assets relevant to the China market. 

Wang’s first taste of the SPAC world came through Hong Kong-listed China Minsheng Financial, which he joined as CEO in 2016 after retiring from TPG. The brief was to pursue outbound M&A, but the imposition of currency conversion restrictions forced a rethink. Minsheng Financial opted for a SPAC and CM Seven Star raised $200 million last October. It has yet to make an acquisition. 

Wang stepped down as CEO of Minsheng Financial to lead the CM Seven Star, but it was agreed he could launch SPACs of his own as well. This led to TKK Symphony. He notes that the decision to quit his job with a public company to run a SPAC prompted amusement and bemusement in the Asia PE community. But beyond the potential economic gains, the move was driven by a belief that SPACs can deliver optimal investment outcomes in China. Specifically, Wang sees it as helpful in preserving the alignment of interest between company founder and minority private equity backer.

“We are rolling the controlling interest into the listed entity, so there is no fight between the original shareholder, new shareholder and management, which tends to destroy value,” he explains. “We aren’t putting $200 million into a $1 billion company and waiting for the controlling shareholder to want to go for an IPO. There is no need to wait. In one swoop we achieve the goal of listing, so it’s a bit like a control deal without taking control.”

Exit options

For Saxena, who raised $56 million for Tenzing Acquisition Corporation, the SPAC experience began in 2005 while he was CEO of Invesco Private Capital. One of the firm’s portfolio companies, US-based restaurant chain Jamba Juice, was acquired by a blank check company at a valuation of approximately $265 million. He nearly took part in another in 2015 when a NSR-backed business was lined up for a merger, but market volatility put paid to that plan.

 “When we were approached in 2005 it took some understanding on our part. What is a SPAC? Should we use a SPAC? We had all those questions to answer. That’s definitely not the case today. People are much more familiar with SPACs,” Saxena says.

He admits that many Indian entrepreneurs still must go through this educational process, but it isn’t necessarily a tough sell. There is so much unsatisfied demand for liquidity in India – it is estimated that approximately $160 billion has been deployed in the country over the past 10 years but realized proceeds amount to $60 billion – that another path to exit would be welcomed.

In this sense, Tenzing Acquisition, which is entirely separate from NSR’s activities, is intended to follow a similar strategy to many SPACs in the US by targeting assets that already have a financial sponsor. Boltz of Gibson Dunn agrees that the approach could have mileage in Asia. “There is pent up demand for alternative ways of getting listings done,” he says. “Reverse mergers aren’t making a comeback any time soon, so SPACs could be well poised.”

That said, SPACs aren’t for everyone. A sponsor receives 20% of the shares once a structure lists, but these only hold value if there is an acquisition. Meanwhile, the sponsor must pay the underwriters and lawyers involved in the listing and cover the research, administrative, and payroll expenses incurred during the deal sourcing and execution process. For a well-resourced $200 million SPAC, Wang puts the costs at around $6.5 million.

“Whatever you raise is placed in a trust and managed by a bank, which can only hold the money in treasury bills. Everything, including the interest incurred, is entrenched for the benefit of the investors. Management can’t touch it,” he adds. “And if you fail to create a business combination, the SPAC is liquidated, and you get nothing. You take that risk. You get 20% of free equity upside, but even after a combination, the shares are normally locked up for a year.”

For a deal to proceed, a majority of investors must vote in favor, but they might do this and exercise their right to redeem at the same time. Each unit in a SPAC offering typically comprises one ordinary share and one warrant. Hedge funds are frequent subscribers: investments are subject to a fixed timeframe; there is the potential for equity upside if they like the deal; and at a minimum, they can redeem on combination and recover their principal plus interest and some upside on the warrants.

This means is that, even if a transaction is approved, there could be substantial turnover in the investor base as hedge funds are replaced by long-only mutual funds. “The initial shareholders might be doing it for a small amount of fixed return and they aren’t the right long-term holders,” Saxena explains. “You have to go back and convince a new set of investors to be buyers of those shares.”

A ticking clock

The other challenge is time. Tenzing Acquisition and TKK Symphony have 18 months to complete a deal, although the latter can invoke a four-month extension by awarding investors another half warrant. A target company might stretch out negotiations and then push for more favorable terms at the very end, recognizing that a SPAC’s bargaining power diminishes the closer it gets to the deployment deadline. 

Similarly, a looming deadline could result in adverse selection. “The incentives get a bit uncomfortable towards the end,” says a Hong Kong-based fund formation lawyer. “If you have gone to all the effort of launching a SPAC and hitched your reputation to it, you can imagine that as time is running out you would be keen to do a deal as opposed to handing money back.”

The overarching question – asked with the problem assets of the pre-global financial crisis period in mind – is whether a company is ready to go public. It is not just a matter of size, but the quality of the management team and the durability of the business model. 

While the emergence of SPACs in Asia with recognized sponsors confers credibility on the companies they bring to market, success stories are needed. This is a key consideration not only in winning over investors but also in persuading stock exchanges in Asia to allow the structure. At present, only Malaysia and Korea permit it. “If deals get done and there is some actual trading on post-merger stocks, I think SPACs will take off here again. If not, people will be wary,” says Boltz of Gibson Dunn.

And even if SPACs do live up to their promise, the public markets must remain strong enough, for long enough, so that more offerings can get out of the gate.   

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• Topics
• Fundraising
• Greater China
• South Asia
• North America
• Buyout
• China
• India
• TPG Capital
• NSR New Silk Route Partners