Asian exchanges have been reluctant to embrace the all-popular IPO structures but that might be set to change – if they can find a way to secure investors’ rights
SPACs have been the topic du jour for the past 18 months or so. Is it prime time for Asian exchanges to allow these IPO structures to list in the region, and should the Asian community contemplate sponsoring SPACs?
In recent months we’ve seen a variety of well-known Asian names embrace the SPAC trend, with the likes of L Catterton Asia Acquisition Corp in March and HH&L Acquisition Co in February, to name a few, announcing transactions in the US.
And there are plans in the works for SPAC transactions from other high profile names, such as Richard Li and Peter Thiel – which are launching their third SPAC – as well as New World Development’s Adrian Cheng, whose SPAC raised US$300m last month.
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But as at the time of writing, all of these SPACs have, or are looking to, list in the US, as only the Malaysian and Korean Stock Exchanges allow SPAC entities to list in Asia.
SPACs are not a new trend. In their rawest form, they’ve been around since the 1980s. If we fast-forward to more recent data, we can see that 2005 was the beginning of the recent SPAC trend – when about 30 SPAC IPOs took place, followed by a complete drop-off in 2008/2009.
There was a resumption in activity in 2016 but 2019 was the real start of the ‘SPAC boom’ and of the most recent period of growth in activity.
Since 2019, the average SPAC IPO size has increased to about US$320m, with the average de-SPAC coming in slightly below at US$900m. With currently over 420 SPACs in the market, that represents in excess of US$100bn in capital to be deployed to acquire targets, with 24 months or less to complete.
As the only feasible option for many of these blank-cheque companies, the US market has become extremely crowded. This makes it difficult for those searching for a viable target.
For Asia – South-east Asia and China in particular – though, where a number of great target companies are ready to potentially “de-SPAC”, enter business combinations and public listings, this bodes well.
But just as Asian exchanges have begun to publicly demonstrate interest in the phenomenon, SPAC market dynamics in the US look to be slowing down. What is obvious is that there is clear downward pressure on the market. But whether that is in the form of slight cooling or a broader correction, remains to be seen.
The IPOX SPAC index, which tracks the after-market performance of SPACs (US IPO), is down about 23% from its peak mid-February. The Indxx SPAC and NextGen IPO Index, a passive index that tracks the performance of newly listed SPACs since 2017, peaked in mid-February and has since dropped 28%. While the CNBC SPAC indices are showing similar weakness with a 20% drop.
Our view is that, rather than signalling an end of the recent boom in activity, the market is taking is breather, having got ahead of itself. The fundamental conditions underpinning the heightened SPAC activity are still present – liquidity, higher volatility, dry powder with institutional investors, rapid innovation in technology and ESG context.
Of the two markets in Asia that have previously allowed SPAC IPOs, the track record has been somewhat of a mixed bag.
Since 2009, Korea has seen 199 SPAC IPOs list, 196 of which were on the Kosdaq. The remaining three that listed on the Kospi ultimately failed to find acquisition targets, and as such were disbanded. But this year, NH SPAC 19 is testing the mainboard waters once again.
Malaysia, meanwhile, has seen five SPACs list – two of which successfully navigated to find acquisition targets and become fully operational companies. The remaining three underwent liquidation – due to lack of a target, lack of shareholder approval, and lack of regulatory approval, respectively.
Other exchanges in the region are understandably cautious but change is on the horizon.
Earlier this year, the Singapore Exchange released a consultation paper to assess the possibility of allowing SPAC IPOs to list in the city state. It is not the first time that Singapore has considered allowing SPAC IPOs to list, having previously launched a consultation paper in 2010.
While the conclusion of the consultation is yet to be revealed, what we do know is that the SGX is looking at formulating the framework and the rules, should the adoption of SPAC IPOs be approved.
Some key items contemplated by SGX are: a higher minimum size of SGD300m, companies would have three years to find an acquisition target, rather that the up to two years seen in the US, and permitted related parties’ transactions for de-SPAC.
And at the same time, target companies would have to meet SGX listing rules, complying with profit, revenue and market capitalisation requirements.
HONG KONG EXPLORATION
The Hong Kong Government has also indicated the city’s stock exchange would explore the possibility of allowing SPAC IPOs. Likewise, Indonesia and Japan are also considering their options. The Australian exchange is taking a more visibly cautious approach at this stage, having held a series of informal discussions with market participants over recent months.
So, as Asian exchanges explore these new rules to welcome SPACs to their shores, one clear area of concern remains – how to safeguard investors’ rights during-and-post business combination.
The very nature of the SPAC means that investors have little insight into the business that the listed entity will pursue, must rely on the target companies’ managements’ ability to deliver often lofty projections and thus must invest entirely based on the track record of the SPAC’s sponsors’ previous investments.
In the US, protection mechanisms – including lawsuits and various types of litigation – act as a safety net for investors. In order to ensure a high degree of security for investors, it is more than likely that SPACs will be subject to much greater scrutiny and regulation in Asia. Which may slow the process.
How Asian Exchanges will tackle this remains at the forefront of most investors’ minds but one thing is certain, there is no easy solution.
As of few days ago, not many SPACs of Asian origins have found targets to proceed with their de-SPAC yet. Asian sponsors are, for now, going to the US. But that will change soon. If Asia wants to make the most of this trend, now is the time to take action.
- Raghu Narain is Head of Investment Banking, Asia Pacific, at Natixis