SPACs in Asia: Out of the comfort zone

Eighteen months after its IPO collapsed in acrimony, WeWork is said to be plotting a path to a US listing via a merger with a special purpose acquisition company (SPAC). The company’s anticipated rejuvenation – albeit at a more modest valuation – underlines the reach of the SPAC phenomenon, but WeWork wouldn’t be the first co-working space operator to go public in this fashion: China-based Ucommune did so last November.

Ucommune’s own IPO stalled in late 2019 amid the fallout from WeWork. It ended up merging with a SPAC launched by a US family office with ties to China. Targeting an exchange that boasts both liquidity and a familiarity with co-working space business models makes sense, but would Ucommune have been better served listing closer to home?

As Asia-based assets are increasingly pursued by SPACs that have raised money out of the US, local exchanges want a piece of the action. Singapore, Hong Kong, and Indonesia have indicated they will consider permitting SPACs, with the Indonesia Stock Exchange suggesting a breakthrough could come as early as July. It remains to be seen how these bourses adapt to a structure that is at odds with their approach to regulation, or indeed whether there is sufficient investor demand.

“There must be a legal and regulatory environment that permits the establishment of a SPAC. In a way it’s like the public funds formed in Hong Kong to make investments where ownership is capped at 30%, and these aren’t very popular,” says Simon Luk, a partner at Winston & Strawn. “There must also be a commercial need for these structures – unicorns willing to take that route for listing and institutional investors in Asia that will invest in the target after listing.”

Regulatory obstacles

The pace of SPAC fundraising in the US continues to amaze. As of March 8, 228 offerings had generated proceeds of $73.3 billion in 2021. This compares to $83.3 billion from 248 in the full 12-months of 2020 and $13.6 billion from 59 the year before that.

The structure is available in other markets, it just hasn’t really caught on. Khailee Ng, a Southeast Asia-based managing partner at 500 Startups, notes that Malaysia used to have oil and gas SPACs for exploration – if a SPAC doesn’t do a deal in 18-24 months investors get their money back – but they failed to get traction. Meanwhile, UK SPACs don’t offer redemption rights, so investors are unable to recoup their principal automatically on completion of a merger if they don’t want to stick around.

The Singapore Stock Exchange (SGX) issued a consultation paper on SPACs in 2010 that ultimately came to nothing. Jeffrey Chi, a managing director of Vickers Venture Partners, claims to have advised SGX to reconsider last year when his firm was preparing for its SPAC offering in the US.

“SGX has been struggling to attract IPOs. It saw an opportunity with the Southeast Asia unicorns, but those companies have their eyes set on the US. If a traditional listing isn’t sufficient to draw them here, maybe a SPAC listing with a few hundred million in the bank might do it,” he notes. “They said MAS [Monetary Authority of Singapore] wouldn’t allow it because the structure moves approvals away from the regulators to the SPAC manager. But now they are having second thoughts.”

Regulation is a major obstacle for Asian exchanges. IPOs in the US operate under a disclosure-based system, with investors essentially participating at their own risk. SPACs are even lighter touch. The key safeguard comes at the point of merger when investors have the right to vote down a deal; there is no meaningful regulatory oversight designed to establish whether it is in their interests.

Listing applicants in Hong Kong and Singapore must go through an approvals system intended to protect less sophisticated investors. Several industry participants question whether Hong Kong would allow mergers to proceed without the same level of scrutiny as an IPO. And this might remove one of the main draws of a SPAC, which is to offer a less protracted route to market.

“Can Singapore and Hong Kong develop fast enough to accommodate SPAC behavior? It’s a challenge,” says Denis Tse of Korea’s ACE Equity Partners, which recently merged its SPAC with a US semiconductor company. “Hong Kong spent years trying to mitigate the risks that came with reverse mergers. If they revert to supporting reverse mergers [SPACs are similar in nature], imagine the implications. You need a resilient market and a strong class action litigation to protect investors.”

Various compromise solutions are suggested, including licensing regimes for those that want to sponsor SPACs and qualification criteria for merger targets. The latter is essentially a means of ensuring zero-profit, high-cash-burn businesses stay beyond the reach of SPACs, although these are the sort of new economy assets to which investors want exposure.

Lacking depth?

Even with an acceptable system, the de-SPAC remains problematic. This is when investors in the SPAC – often hedge funds that like the combination of shares that can be redeemed and convertible warrants that can be held in the hope of future upside – are replaced by long-only mutual funds. There is usually a parallel PIPE deal that brings in select investors to offset redemptions. It is unclear whether capital markets in Asia are deep enough for this.

“It has taken more than 30 years for SPACs to develop in the US. They came into favor 10 years ago for a short time, then disappeared, and now they are ridiculously popular,” says Luk of Winston & Strawn. “SPACs are being sponsored by big groups and attracting institutional investors that understand the business of the target. Hong Kong would need to examine whether it is in a good position to compete with an established, mature product in the US.”

Target companies must also consider which exchange represents the best long-term proposition. Some technology-oriented business models are more well-received in the US, but there appears to be increasing faith in secondary market trading in Hong Kong. The same cannot be said for Singapore, which is why Southeast Asia’s unicorns are looking elsewhere. There could be a market for sub-unicorns, but it is unclear if these companies are ready for the capital markets.

“The Asian exchanges are definitely going to try [with SPACs], but what if no one wants to list there? The fear is you end up with something weird in Singapore when you could’ve merged with a SPAC in the US,” says Ng of 500 Startups. “Most founders are obsessed about the long-term survival of their companies. They don’t want to be distracted by something shiny.”

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Greater China
• Southeast Asia
• IPO
• Fundraising
• Regulation
• Asia
• Hong Kong (China)
• Singapore
• Indonesia
• SPAC
• 500 Startups
• Ace Equity Partners
• Vickers Venture Partners