The skyline of the central business district of Marina Bay Sands in Singapore on Tuesday, November 3, 2020.
Lauryn Ishak | Bloomberg | Getty Images
The hottest trend on Wall Street could go to Asia.
SPACs – or special-purpose acquisition companies – are attracting interest in Asia, and the first wave of local listings will be a test of investor appetite in the region, according to CNBC.
“I think there is definitely interest as SPACs are apparently offering this alternative platform to a traditional IPO,” Max Loh, Asean IPO Leader at EY, told CNBC in late February.
SPACs are shell companies set up to raise funds through an IPO for the sole purpose of merging with an existing private company or to acquire it and go public.
This process usually takes two years. If the acquisitions are not completed within this period, the funds will be returned to investors.
SPACs are sometimes referred to as “blank check companies” because investors do not know beforehand which private companies the funds will buy.
Growing interest in Asia
To be clear, SPACs aren’t new – they’ve been around since the 1990s.
Part of the recent interest can be attributed to a low interest rate environment that has resulted in too much liquidity, Loh said. Add that SPACs are an “attractive proposition”.
Private companies view SPACs as an alternative way of gaining access to the capital market rather than the traditional IPO route, which can be more time consuming and require closer scrutiny.
A growing number of sponsors based in Asia support SPACs.
Asia is also a target region for acquisitions for many of the SPACs – especially highly valued companies in Southeast Asia preparing to go public. According to Reuters, ride hail giant Grab is in talks to go public by teaming up with a SPAC.
Data shared by analytics provider Dealogic showed that the number of Asia-facing SPAC companies rose from 0 in 2016 to 8 last year, raising approximately $ 1.44 billion. However, in 2020 only four Asia-focused SPACs were successfully completed.
In the first three months of 2021, there were already six such companies, which together raised $ 2.7 billion.
Chew Sutat, director of global sales and origination at market operator SGX in Singapore, told CNBC last week that SPAC’s can provide companies with a relatively easy way to raise funds in volatile conditions.
“With a good framework that aligns and aligns the interests of investors, corporations and sponsors, this could catalyze and strengthen SGX’s role in helping regional businesses grow and access global investors through Singapore’s capital market platforms,” said Chew via email.
Investor appetite test
The SPACs’ explosive growth has been mainly focused in the US, where it took the market just three months to surpass its record breaking 2020 year. Funds raised by US SPACs so far this year have been more than $ 87 billion, compared to $ 83.4 billion in issuance last year.
That trend is expected to continue as the US SPAC listings outperform traditional IPOs, according to Romaine Jackson, director of Southeast Asia at Dealogic.
“The first SPACs in Asia will be a test of investor appetite. The market needs to understand whether investors can invest conveniently without the same access to the issuer and control,” he said via email last month.
Currently, very few Asian markets allow SPACs to list on local exchanges, and sponsors based in Asia go primarily to the US
Financial centers like Singapore and Hong Kong are looking for ways to list SPACs, but there is no specific indication of when blank check companies are allowed to list on their exchanges.
According to Bruce Pang, head of macro and strategy research at China Renaissance Securities, Asian companies and investors want to experience the SPAC wave regardless of which exchange will emerge as the SPAC center in the east.
“The Asian exchange with the home market effect has the advantage of creating a playing field with a better understanding of business models and streamlining for domestic new economy sectors as Asian businesses flourished and entrepreneurs flourished,” he told CNBC.
Right Rules for SPACs in Asia?
EY’s Loh said it would be critical for Asian exchanges to have the right rules and methodology for running SPAC listings.
When a SPAC is raising money, IPO buyers have no idea what the target company for a possible acquisition will be. Instead, many investors rely on the track record of the SPAC sponsors to invest the blank check companies.
One concern of investors is whether the target companies are scrutinized and scrutinized as closely as they are with traditional IPOs, Loh said. Proper rules and regulations can alleviate that concern, he said.
Loh explained that there isn’t “too much of a difference” between companies in the process of going public and those going through SPACs, adding that the quality of the underlying company matters.
Pang of China Renaissance stated that regulatory uncertainties remain a major concern when adopting SPACs in Asia as authorities and exchanges need to provide popular and convenient avenues for regulation.
“Given the prudent stance of the Asian stock exchanges and the tightening of shell company reviews, backdoor listing, reverse takeover or reverse merger, all of which are similar vehicles to SPACs that companies may also use to review IPOs and If regulatory oversight can bypass it, the exchanges are unlikely to fully embrace SPACs anytime soon, ”he said.
Pang also expects Hong Kong to be better positioned than Singapore as a SPAC hub in the Asia-Pacific region because of its “diverse and liquid IPO market” on par with New York and London.
Loh added that alongside traditional IPOs, as well as venture funds and private equity, SPACs will provide another alternative platform for raising capital.
“It makes sense for Singapore to be a major SPAC hub as we are a financial center. The key is the rules, execution and quality of the businesses,” he said.
