Increasing interest in Asia for empty check companies

The strongest trend on Wall Street can be directed towards Asia.

SPACs – or special-purpose procurement companies – are attracting interest in Asia, and the first wave of local listings will be a test of investors’ appetite in the region, experts told CNBC.

“I think there is definitely an interest, because SPACs obviously offer that alternative platform from a traditional IPO,” said Max Loh, the ASE IPO leader at EY, in late February.

SPACs are shell companies created to raise money through an initial public offering (IPO), with the sole purpose of merging or acquiring an existing private company and making it public.

This process usually takes two years. If the acquisitions are not completed within this time, the funds are returned to investors.

SPACs are sometimes referred to as “blank check companies” because investors do not know in advance which private company will be acquired from the funds.

To be clear, SPACs are not new – they have been around since the 1990s.

Some of the recent interest rates can be attributed to a low interest rate environment that has led to a lot of liquidity, Loh said. adding that the SPACs present an “attractive proposal”.

Private companies see SPACs as an alternative way to access the capital market, instead of the traditional IPO route, which can be more time consuming and involve more control.

An increasing number of Asian sponsors support SPACs.

Asia is also a target acquisition region for many of the SPACs – especially highly regarded companies in Southeast Asia that are ready to go public. According to Reuters, the giant Grab, which participates in the talks, will become public by merging with a SPAC.

Data shared by analytics provider Dealogic showed that the number of Asia-focused SPACs increased from 0 in 2016 to 8 last year, raising about $ 1.44 billion. But only four Asia-oriented SPACs have been successfully completed in 2020.

In the first three months of 2021, there were already six such companies that collectively raised $ 2.7 billion.

Chew Sutat, head of global sales and initiation at Singapore market operator SGX, told CNBC last week that SPACs can provide companies with a relatively easy way to raise funds in unstable conditions.

“With a good framework that balances and aligns the interests of investors, companies and sponsors, it could catalyze and strengthen SGX’s role in helping regional companies grow and access global investors through Singapore’s capital market platforms,” ​​Chew said in a statement. -mail.

The explosive growth of SPACs was mainly concentrated in the US, where the market took only three months to break its 2020 record. Funds raised by US SPACs so far this year totaled over $ 87 billion, compared to the $ 83.4 billion issue last year.

This trend is expected to continue where US SPAC lists outperform traditional IPOs, according to Romaine Jackson, head of Southeast Asia at Dealogic.

“The first few SPACs in Asia will be a test of investors’ appetite, the market needs to understand whether investors would be comfortable investing without the same level of issuer access and control,” he said in an email last month.

Currently, very few Asian markets allow SPACs to list on local stock exchanges, and Asian sponsors mostly go to the US.

Financial centers, such as Singapore and Hong Kong, are exploring ways to list SPACs, but there are no concrete indications as to when companies with a blank check could be listed on their stock exchanges.

Asian companies and investors are looking to take the SPAC wave, regardless of the exchange that will emerge as the eastern SPAC center, according to Bruce Pang, head of macro and strategic research at China Renaissance Securities.

“Asian trade with the effect of the internal market has the advantage of providing a playground with a better understanding of business models and rationalities for new sectors of the economy, as businesses thrive and entrepreneurs thrive in Asia,” he said. for CNBC.

Having the right rules and methods to execute SPAC listings would be key to Asian stock markets, according to EH’s Loh.

When a SPAC raises money, people who buy IPOs do not know what the potential acquisition company will be. Instead, many investors rely on success stories for SPAC sponsors to invest blank check companies.

One concern among investors is whether there will be the same level of control and due diligence performed on target companies as in traditional IPOs, Loh said. Having the right rules and regulations can alleviate that concern, he said.

Loh explained that there is “not much difference” between companies that go the IPO route and those that go through SPACs, adding that the quality of the underlying company matters.

China Renaissance’s Pang explained that regulatory uncertainties remain a major concern in the adoption of SPACs in Asia, as authorities and exchanges need to provide popular and convenient ways of regulation.

“Given the cautious attitude of Asian stock exchanges and stricter reviews of shell companies, back listing, reverse takeover or reverse merger, all of these are SPAC-like vehicles that could also allow companies to circumvent control. IPOs and regulatory oversight, stock markets are unlikely to embrace SPACs any time soon, “he said.

Pang also expects Hong Kong to be better positioned than Singapore as an Asia-Pacific SPAC hub due to its “diverse and liquid IPO market” which is on a par with New York and London.

Loh added that SPACs will provide another alternative platform for raising capital, in addition to traditional IPOs, as well as venture capital and private equity.

“Being an important SPAC hub makes sense for Singapore because we are a financial center. The key is the rules, the execution and the quality of the companies,” he said.