Growing interest in Asia for blank check companies

Wall Street’s hottest trend may be heading to Asia.

SPACs – or specialty acquisition companies – are attracting interest in Asia, and the first wave of local listings will test investor interest in the region, experts told CNBC.

“I think there is definitely interest, as SPACs obviously provide that alternative platform of a traditional IPO,” Max Loh, Asean IPO Leader at EY, told CNBC in late February.

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

This process usually takes two years. If acquisitions are not completed within that time frame, the funds will be 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 with the money.

To be clear, SPACs aren’t new – they’ve 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, Loh said, adding that SPACs are an “attractive proposition”.

Private companies see SPACs as an alternative way of accessing the capital market, rather than the traditional IPO route, which can be more time consuming and involves more control.

A growing number of sponsors based in Asia are supporting SPACs.

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

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

In the first three months of 2021, there have already been six such companies, raising a combined $ 2.7 billion.

Chew Sutat, head of global sales and origination at Singaporean market operator SGX, told CNBC last week that SPACs can provide a relatively easy avenue for companies to raise funds in volatile 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 businesses grow and access global investors through the capital market platforms of Singapore, ”Chew said by email.

The explosive growth of SPACs has mainly centered around the US, where it took the market only three months to surpass the record-breaking 2020. Funds raised by US SPACs so far this year totaled more than $ 87 billion, compared to last year’s entire issuance of $ 83.4 billion.

According to Romaine Jackson, head of Southeast Asia at Dealogic, that trend is expected to continue where US SPAC listings outpace traditional IPOs.

“The first few SPACs in Asia will be a test of investor interest, the market must understand whether investors would be comfortable investing without the same level of issuer access and control,” he said by email last month.

Currently, there are very few Asian markets that allow SPACs to list on local exchanges and Asia-based sponsors usually go to the US.

Financial centers such as Singapore and Hong Kong are exploring ways to list SPACs, but there is no concrete indication as to when blank checks should allow companies to list on their exchanges.

According to Bruce Pang, head of macro and strategic research at China Renaissance Securities, Asian companies and investors want to join the SPAC wave regardless of which exchange will become the SPAC center in the East.

“Asian exchanges with the home market effect have the advantage of providing a playing field with greater understanding of business models and rationale for new homegrown economy sectors as businesses flourished and entrepreneurs flourished in Asia,” he told CNBC.

Having the right rules and methods to run SPAC offers would be key for Asian exchanges, according to EY’s Loh.

When a SPAC is raising money, people who buy into the IPO do not know what the ultimate target company for the acquisition will be. Instead, many investors rely on the track record of success for the SPAC sponsors to invest the blank check companies.

A concern among investors is whether there will be the same level of research and due diligence on target companies as with traditional IPOs, Loh said. Having the right rules and regulations can reduce those concerns, he said.

Loh explained that there isn’t “too much difference” between companies going the IPO route and companies going through SPACs, adding that it’s the quality of the underlying company that matters.

Pang of China Renaissance explained that regulatory uncertainties are still one of the top concerns in the adoption of SPACs in Asia, as authorities and exchanges must provide popular and easy ways for regulation.

Given the cautious stance of Asian stock exchanges and the tighter assessments of empty companies, back door listing, reverse takeover or reverse merger, all of which are comparable to SPACs that can also allow companies to bypass IPO scrutiny and regulatory oversight it’s unlikely that the exchanges will fully embrace SPACs anytime 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” comparable to New York and London.

Loh added that SPACs will provide another alternative platform to raise capital in addition to traditional IPOs, venture capital funds and private equity.

“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 businesses,” he said.