Growing interest in Asia for companies with blank checks

The hottest trend on Wall Street could be directed 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, experts told CNBC.

“I think there is definitely an interest because SPACs obviously offer this alternative platform to a traditional IPO,” Max Loh, Asean’s IPO leader at EY, told CNBC in late February.

SPACs are front 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 that time, the funds are returned to investors.

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

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

Some of the recent interest can be attributed to a low interest rate environment that has resulted in a lot of liquidity, said Loh, 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 scrutiny.

An increasing number of sponsors based in Asia are supporting SPACs.

Asia is also an acquisition target for many SPACs – particularly highly valued companies in Southeast Asia that are about to go public. Hitchhiking giant Grab is reportedly in talks to go public when it merges with SPAC, according to Reuters.

Data shared by analytics provider Dealogic showed that the number of SPAC companies focusing on Asia grew from 0 in 2016 to 8 last year, raising about $ 1.44 billion. But only four SPACs targeting Asia were successfully completed in 2020.

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

Chew Sutat, head of global sales and origination for Singapore market operator SGX, told CNBC last week that SPACs can provide a relatively easy way for companies to raise funds under volatile conditions.

“With a good structure that balances and aligns the interests of investors, companies and sponsors, it can catalyze and strengthen SGX’s role in helping regional companies to grow and access global investors through Singapore’s capital market platforms,” ​​he said. Chew by email.

The explosive growth of SPACs was mainly concentrated in the USA, where the market took just three months to beat the 2020 record. Funds raised by US SPACs so far this year have totaled more than $ 87 billion, compared to the issue of $ 83.4 billion over the past year.

This trend is expected to continue where SPAC listings in the U.S. are overtaking traditional IPOs, according to Romaine Jackson, Dealogic’s head of Southeast Asia.

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

Currently, very few Asian markets allow SPACs to be listed on local exchanges and sponsors based in Asia are mainly going to the USA.

Financial centers like Singapore and Hong Kong are exploring ways to list SPACs, but there are no concrete indications of when blank check companies would be allowed to list on their exchanges.

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

“Asian exchanges with the effect of the domestic market have the advantage of providing a playing field with a better understanding of business models and fundamentals for the new sectors of the local economy, as companies prospered and entrepreneurs prospered in Asia,” he told CNBC.

Having the right rules and methods for running SPAC listings would be critical for Asian exchanges, according to Loh of EY.

When a SPAC raises money, the people who are buying the IPO do not know what the eventual target company of the acquisition will be. Instead, many investors rely on the successful track record of SPAC sponsors to invest in blank check companies.

A concern among investors is whether there will be the same level of scrutiny and due diligence carried out at target companies that exists in traditional IPOs, said Loh. Having adequate rules and regulations can mitigate this concern, he said.

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

Pang, from China Renaissance, explained that regulatory uncertainties remain a major concern when adopting SPACs in Asia, as authorities and exchanges need to provide popular and convenient means of regulation.

“Considering the prudent attitude of Asian stock exchanges and more restrictive analyzes on shell companies, backdoor listing, reverse acquisition or reverse merger, all of which are vehicles similar to SPACs that can also allow companies to bypass IPO scrutiny and regulatory oversight , it is unlikely that exchanges will fully 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 “diversified and liquid IPO market” that 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 funds.

“Being a major hub for SPACs makes sense for Singapore because we are a financial center. The fundamentals are the rules, the execution and the quality of the companies ”, he affirmed.