SPACs: Longer menu

Investment banks have pitched nearly every GP in Asia on the merits of launching US-listed special purpose acquisition companies (SPACs), securing mergers with IPO-ready assets, and receiving a chunk of dirt-cheap equity for their trouble. Affirma Capital listened to these entreaties, but then demurred.

“The targets were typically over $1 billion in market capitalization, and we are mid-market investors, so they don’t fall in our wheelhouse. We also saw an oversupply of SPAC money chasing a limited number of opportunities in Asia and the SPAC sponsors varied in terms of quality and profile. Some sponsors had very short agendas in terms of cashing in the promote,” says Nainesh Jaisingh, CEO of Affirma.

“We thought this would lead to poor quality deals in which investors would lose out, and we didn’t want to be associated with the kind of outcome we’re now seeing, with a lot of SPAC deals underwater.”

But Jaisingh is very much open to raising a SPAC under Singapore’s new regime, which came into force last month. Based on guidance Affirma has received, targets will be sub-$1 billion, investors are more likely to be long term-oriented, and there are clear criteria as to who can participate as a SPAC sponsor. It all points to less irrational competition for assets and fewer unsavory outcomes, Jaisingh maintains.

The emergence of Singapore as Asia’s preeminent SPAC hub appears to rest on two issues: whether longstanding concerns about limited liquidity, which have made GPs more inclined to delist companies from the Singapore Exchange than list them there, can be properly addressed; and whether Hong Kong really wants to be a meaningful player in this segment.

Government-related entities in Singapore have announced a string of initiatives – including a pre-IPO fund and an IPO anchoring fund – to attract listings by high-growth companies. Meanwhile, Hong Kong’s proposed SPAC guidelines might have been designed to limit the structure’s appeal.

“Some Hong Kong SPACs will list, for policy reasons if nothing else – sponsored by tycoons trying to gain goodwill from the government or by Chinese financial institutions,” says Marcia Ellis, a partner at Morrison & Foerster. “But the market participants, the potential underwriters, are asking how they can sell this thing as is.”

Moment of reckoning

Industry participants have looked on with interest as Singapore and Hong Kong seek to reconcile apparently conflicting priorities: replicating the lighter touch oversight that makes SPACs attractive in the US, remaining true to their own approvals-oriented systems geared towards protecting less sophisticated investors, and capturing start-ups before they can go public elsewhere.

What amounts to a sweeping debate about how far freedoms should stretch in well-run capital markets is taking place as questions are asked of the US model and regulators move to tighten their grip.

There are still plenty who argue that a SPAC is more efficient than a traditional IPO, but the glut of issuance and subsequent weak performance has undermined confidence. Asian start-ups being tapped up as merger targets may appreciate how Singapore and Hong Kong are trying to create regimes that don’t descend into a free-for-all – or they might be spooked by SPACs in general.

“There was a lot more activity in the first half of the year, I haven’t seen it manifest as much in the last few months,” says Tushar Roy, a Singapore-based partner at Square Peg Capital.

“If you are a SPAC pitching to a company, it’s not the best time to make your case. Founders know a lot more than they did before. They are looking at the market and saying, ‘Tell me why this makes sense.’ But if the right sponsor walks into the right company, it’s a very easy conversation to have.”

Nearly 500 SPACs have raised $137.9 billion so far this year, compared to $83.4 billion from 248 offerings in 2020 and $13.6 billion from 59 in 2019. Of the approximately 800 in total, more than 60% are still looking for merger targets. Most of the fundraising activity took place earlier in the year before regulatory intervention on accounting and other issues blunted activity.

Most existing SPACs are trading below their IPO prices, including those that have completed mergers this year, while exchange-traded funds that track SPACs are trailing the S&P 500 Index. Of the handful of PE or VC-backed Asian companies to complete SPAC mergers in recent years, only New Frontier Health Corporation has traded above its offering price post-merger – when the consortium behind the SPAC sought to take the business private again.

Several more mergers have been announced in 2021: super app Grab, real estate portal PropertyGuru, and consumer credit platform Kredivo in Southeast Asia; autonomous driving specialist Plus, coffee-and-donut chain Tim Hortons China, and direct-to-consumer brand DayDayCook in China; Hong Kong genetic testing player Prenetics; and Gogoro, a Taiwan start-up with a battery-swapping solution for scooters.

“When we were raising, more than 90% of all technology-focused SPACs were looking for deals in the US. The same guys were driving up Route 101 looking at the same companies – there were SPAC-offs where companies pitted SPACs against one another to come up with the best terms. We differentiated ourselves by concentrating on Asia and Europe,” says Homer Sun, CEO of Poema Global, sponsor of the SPAC that is merging with Gogoro.

Be big, be relevant

Poema had two key criteria in selecting a merger target. It wanted a company with a robust universe of comparable companies trading in the US and an equity value above $1 billion. This was to ensure there would be enough investors who understood the business model and could translate that knowledge across geographies and enough liquidity to attract long-term institutional investors.

Donald Tang, president of D8 Holdings Corp, Hong Kong-based sponsor of the SPAC that merged with US surgical robotics business Vicarious Surgical, places the bar even higher. To be relevant to larger investors, a company should have a de-SPAC valuation of at least $2 billion.

The Grab transaction envisages an enterprise valuation of more than $30 billion. Of the others, all bar one is above the $1 billion threshold, ranging from $1.25 billion for Prenetics to $3.3 billion for Plus. The outlier is DayDayCook on $300 million.

When Vickers Venture Partners launched a SPAC, it sought a relatively modest amount – $138 million versus an average of $279 million in 2021 – with a view to focusing on smaller targets. According to Jeffrey Chi, a managing director at the firm, he would be willing to go even smaller because it offers more options in terms of deal size.

The sticking point is the PIPE that accompanies the de-SPAC, where institutional investors endorse the merger and the valuation by making long-term commitments to the company. They often replace hedge funds that buy SPAC shares for an uptick in price on announcement of a merger and for the convertible warrants that come attached. Hedge funds typically approve the transaction and redeem their shares.

The PIPE has become especially important given the increase in redemption rates in recent months. A smaller company may not have a large enough issuance to attract big-ticket investors that are increasingly picky. DayDayCook said it planned to raise $30-40 million but didn’t identify any participants; Grab stands to receive $4 billion from the likes of BlackRock and Fidelity.

“There is usually a pop in the price when the merger is announced and investors come into the PIPE at the IPO price, so they don’t need to buy off the market,” says Chi. “Now, though, prices aren’t moving post-announcement, so investors don’t see why they should buy into the PIPE and get locked up for six months. It only makes sense if they want to go big on the company and there isn’t enough allocation.”

One solution for smaller companies is to dispense with the PIPE entirely and raise capital to validate the market price rather than bolster the balance sheet, he adds. This only works with businesses that are cash flow positive or willing to raise another private round ahead of the merger.

Home comforts?

Poema ended up securing commitments from strategic investors as well as traditional institutional players, with Foxconn Technology Group and GoTo represented in the $257 million PIPE. D8 Holdings had a similar experience with Vicarious Surgical. Strategic investors, including global medical technology giant Becton Dickinson, accounted for one-third of the $115 million PIPE.

“It’s a pre-revenue med-tech company. You call up the medical devices group at Fidelity and it doesn’t happen,” says a Hong Kong-based investment banker. “It’s not because the story isn’t good, it’s just when the Fidelity guy hears that it is a de-SPAC PIPE for an Asia-domiciled sponsor that’s bought a US med-tech company, his eyes glaze over. He can get the same outcome with listed companies.”

The banker adds that US investment banks have made little or no effort to pitch PIPEs involving Asian target companies to Asia-based investors. When local groups do take part, they tend to be sourced through the sponsor’s network, as evidenced by the strong Taiwan support for Gogoro.

PropertyGuru and Kredivo did win support from larger institutions for PIPEs of $100 million and $120 million, respectively. Square Peg’s Roy attributes this to the credibility of the sponsors. PropertyGuru is merging with a SPAC launched by a Silicon Valley luminary (Peter Thiel) and a Hong Kong tycoon (Richard Li), while the sponsor behind the Kredivo SPAC, Victory Park Capital, is an established name in the credit investment space (and had previously lent money to Kredivo).

“Southeast Asia is still relatively unknown for the US markets, but if you find the right sponsor, they can help you bridge that. Investors haven’t heard of you, but they know the sponsor, and this gives you a legitimacy, a stamp of quality. That’s much easier than going around and pitching people, explaining what Southeast Asia is,” Roy says.

Beyond that, it comes down to the quality of the company. Many SPAC merger targets are immature and destined to remain pre-revenue for several years; relatively few are category leaders with significant revenues, scale, and growth rates, plus the infrastructure to support a US listing. “I don’t think a life sciences company from Singapore with zero revenue should be trying to do a SPAC in the US,” Roy adds.

This raises the question as to whether such companies would be better served merging with SPACs in Singapore or Hong Kong, where they might have greater brand recognition. It is very early days, even for SGX, which has a regime in place. So early, in fact, that Chi of Vickers admits he is yet to have a conversation with a start-up about waiting for Singapore to gain traction rather than pushing for the US.

Nevertheless, the venture capital firm’s informal conversations with SGX are about to become formal. It expects to be in the second wave of sponsors to launch a local SPAC; the first are rushing to list by year-end. Initial targets are likely to be Southeast Asia-based – companies unsuited to the US market, based on size or other considerations – but China could eventually become a source of deal flow as well.

“The SEC is making it harder for SPAC mergers involving companies with Asian connections, specifically around China,” Chi says. “In the absence of Hong Kong getting its act together on SPACs, Singapore might be a viable option for a lot of Chinese companies that may not be able to go to the US.”

Regional rivals

Singapore appears to have tried harder to make its regime market friendly. Both jurisdictions have minimum requirements for SPAC market capitalization and public float, and plan suitability assessments for sponsors. Industry feedback differed on retail investor participation in SPACs: there was demand for it in Singapore – perhaps due to concerns about limited liquidity – so the government acceded; in Hong Kong, some favored it and others didn’t, so retail investors remained shut out.

The hope was that building a wall around SPACs in Hong Kong would mean more freedoms afforded to those permitted within it. In this context, the proposed regime is a disappointment.

Notably, SPAC investors are only able to redeem their shares once a merger is announced if they vote against the consummation, which may undermine sponsor confidence in getting deals done. The US doesn’t have this link and Singapore removed it from the final guidelines. It remains in Hong Kong’s proposals despite vociferous industry opposition. Few expect the authorities to reverse their position.

“It might be logically sound that you shouldn’t be allowed to vote for the de-SPAC and then redeem, because redemption means you don’t believe in the business combination being proposed to a certain extent,” says Ellis of Morrison & Foerster.

“But that is failing to see how this financial instrument is viewed. Hedge funds see it as lending money to a company for the period it takes to do the de-SPAC, at low interest if any interest at all, and they get a warrant in return. They commit knowing they will get their warrant even if they redeem.”

Other criticisms follow thick and fast. SPACs must have at least 75 professional investors, including 30 institutional players. Individual positions would be so diluted that, in the absence of a $1 billion raise, equity checks wouldn’t be large enough to appeal to key investors, the investment banker observes.

PIPEs are compulsory – driven by a desire to validate the enterprise valuation of the target and dilute the promoter shares – but they must be 25% of the expected market capitalization of the merged entity up to HK$1.5 billion. And at least one asset management firm with at least HK$1 billion in assets must hold at least 5% of the merged entity. Affiliates of the sponsor cannot take part.

“Only a few very big, and probably state-owned, enterprises from China will be able to fulfill these requirements,” says Simon Luk, a partner at Winston & Strawn. “It is requirements on top of requirements. In the US, you might talk to some industrial groups about the PIPE, but here it has to be asset management firms.”

Moreover, several of the procedural attractions a SPAC merger has over a traditional IPO in the US would be muted in Hong Kong under the proposals.

Having the merged entity meet the same requirements that apply to all newly listed companies negates the speed advantage, while the ability to share financial forecasts in listing documents is tempered by the need for comfort letters from reporting accountants and sponsors. “The larger reporting accountants and sponsors may not be willing to do this,” says Vivian Yiu, a partner at Morrison & Foerster.

Competitive dynamics

Industry participants question whether Hong Kong has any real interest in SPACs as a mainstream instrument, pointing to the territory’s longstanding sensitivities regarding reverse mergers. Luk suggests that the government wants to claim parity with the US and Singapore, while limiting the excesses of SPACs. “Two or three will come out perfect, but I doubt there will be more than that,” he says.

One interpretation of the situation is that Singapore recognizes it has ground to make up on Hong Kong as a capital markets hub, which translates into a willingness to move quickly and decisively. Similar behavior is apparent in other areas of financial services.

SGX sees a handful of PE-backed IPOs each year and overall proceeds haven’t topped $1 billion since 2013. AVCJ Research has records of just one offering by a Chinese company in the past decade. Over the same period, an annual average of 25 companies with financial sponsors have raised $13.2 billion in Hong Kong. Most of them are Chinese and the bourse is expected to benefit from a drop-off in US IPOs.

In this sense, SPACs form part of a strategy intended to break the vicious cycle of no quality companies, no investors and no quality companies. Singapore has developed a regime that appeals to an initial batch of sponsors, some of them with government ties. Tapping a wider pool of demand, and doing so consistently, involves answering fundamental questions about the maturity of stock exchanges in Southeast Asia and the liquidity they can provide for technology companies.

“There is a concerted effort to address the longstanding issues around liquidity, and we are waiting to see how this plays out,” says Affirma’s Jaisingh. “Getting a piece of the digital stories coming out of ASEAN is a challenge and Singapore sees SPACs as a way of changing the narrative. Attracting high-growth companies that have a strong following would be a game changer.”

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• Topics
• Greater China
• Southeast Asia
• IPO
• Fundraising
• Regulation
• Asia
• Hong Kong (China)
• Singapore
• Affirma Capital
• Square Peg Capital
• SPAC