SPACs: Flavor of the month

Nearly two years ago, AVCJ ran a story titled “SPACs: Beneficiaries of the bull run.” It highlighted the growing popularity of special purpose acquisition companies in Asia, despite a string of disappointing outcomes when these entities last came to prominence before the global financial crisis.

It wasn’t so much a surge as a tentative reawakening. New Frontier Group, an investment firm established by two former executives at The Blackstone Group – including Antony Leung, previously the firm’s Greater China chairman – and one Hong Kong entrepreneur led the way. They raised $478 million and put that towards the acquisition of Chinese hospital operator United Family Healthcare for $1.3 billion last year. Sing Wang, ex-head of North Asia at TPG Growth, and Parag Saxena, founder of India’s New Silk Route (NSR), launched their own SPACs.

What we have seen in recent weeks has the makings of a wholesale revitalization. Ucommune, a Chinese co-working space operator that failed to get traction with an IPO last year, merged with a SPAC backed by a family office. More activity soon followed: Korea’s ACE Equity Partners announced plans to raise $200 million for an IT infrastructure deal; Peter Kuo, a co-founding partner at Canyon Bridge Capital Partners, raised $115 million; and current and former representatives of Elliot Management, K2 Venture Capital and Argyle Street Management raised $125 million.

Now, as before, Asia’s spike has come on the back of a resurgence in the US. There have been 45 SPAC IPOs so far this year, according to SPACInsider, a website that tracks SPAC activity. This compares to 59 for the entirety of 2019. Churchill Capital Corp recently agreed an $11 billion merger with health services player MultiPlan, the largest-ever SPAC deal. Meanwhile, Pershing Square Capital is looking to raise $4 billion in what would be the biggest SPAC IPO to date.

It helps that public markets remain buoyant. In fact, it is tempting to suggest that the rise of SPACs reflects the disconnect between Wall Street and Main Street – or, for some PE executives, the ease of raising capital from public market investors compared to private institutional investors.

Then there are the incentives. A SPAC is a quick way to raise money – it can take 8-12 weeks – and the disclosure requirements are much lower than for a traditional IPO. The sponsor gets a lot of flexibility in selecting the target company and there is no protracted wait for a liquidity event; completion of the business combination sees the target merge with the listed SPAC. Moreover, the sponsor receives a 20% equity interest in the SPAC once it lists.

That said, not everyone can raise a SPAC and not everyone would want to. First, investors are committing capital to a vehicle that has no assets in the expectation that it will acquire some, so they are likely to favor seasoned dealmakers – although this notion might be challenged under the current conditions. Second, the sponsor must have sufficient resources to pay the bankers and lawyers involved in the listing and cover costs incurred during deal sourcing and execution.

Third, shareholders in a SPAC might vote against the deal once sourced. And even if they support it, they might exit immediately. Offerings typically comprise units of one ordinary share and one or one-half of a warrant. Hedge funds like them because they can redeem once a combination happens and recover their principal plus interest and some upside on the warrants. Should the hedge funds exit, the sponsor might need to sell the deal once again to the long-only mutual fund community.

Finally, if a business combination doesn’t happen within 18 months, everything gets unwound – the capital is returned to investors and the sponsor must write-off the costs. Wang completed a combination in February and his SPAC now holds a minority stake in a China-based short video-plus-e-commerce platform. Saxena, meanwhile, has negotiated several extensions to his investment period – making payouts to shareholders each time – as the search for an appropriate asset continues. The danger in these situations is that a looming deadline leads to adverse selection.

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• Topics
• IPO
• Buyouts
• Fundraising
• Asia