The Rise of SPAC in Asia
Although special-purpose acquisition companies (SPACs) have been used for decades as alternative investment vehicles in United States ("US"), they have recently come into vogue as seasoned investors and management teams have turned to SPACs to mitigate the increased market volatility risk of traditional initial public offerings (IPOs). In fact, 2021 has been a record-breaking year for US SPAC IPOs; the proceeds raised in the first quarter of 2021 have already became more than those raised in 2020. This surge has been driven by the influx of high-profile investors and management teams entering the SPAC space, coupled with an abundance of uninvested capital that had largely been sitting out in 2020.
Given market developments in US SPACs listings in recent years and potential merger and acquisition opportunities in the Asia Pacific region, both Hong Kong and Singapore received increasing market interests to introduce SPACs in their capital markets.
However, SPAC transactions come with their own set of unique challenges, and it is essential for entities to have (1) an understanding of the risks associated with these investment vehicles and (2) a comprehensive project management plan to meet the demands of an accelerated merger timeline.
A SPAC is a newly created company that uses a combination of IPO proceeds and additional financing (PIPEs have been common in recent times) to fund the acquisition of a private operating company. The proceeds raised in the IPO are placed in a trust account while the SPAC’s management team seeks to complete an acquisition of an existing operating company (“target”), generally in a specific industry or geography, within the period stated in the SPAC’s governing documents (typically, 18 to 24 months). If the SPAC successfully completes an acquisition, the private operating company target succeeds to the SPAC’s public filing status and, as a result, the target effectively becomes a public company. If the SPAC is unable to complete an acquisition in the allotted timeframe, the cash held in its trust account is returned to its investors unless the SPAC extends its timeline via a proxy process.
Past and Present
Entities with characteristics similar to those of SPACs have existed for decades in various iterations as “blank check companies” or “public shells.” The term “SPAC” was coined in the 1990s, with sponsors focusing on the technology, media, and health care industries in US. Since then, the popularity of SPAC offerings has ebbed and flowed, depending on economic conditions, trends in capital, and the general health of the IPO market. For example, US SPACs gained popularity in the oil and gas industry in the mid-2010s as depressed commodity prices drove investors toward experienced management teams that were increasingly likely to find existing operating companies or mineral rights for a discount. The number of US SPAC IPOs has increased steadily since 2013, and 2020 has been a banner year in terms of the volume and size of US SPAC IPOs.
Rise in SPAC Use
The increase in the use of SPAC as alternatives to traditional IPOs is the result of a confluence of factors. First, unspent committed capital, or “dry powder,” held by private equity was estimated to be near $1.45 trillion, which bolstered the supply of capital that had mostly been sitting on the sidelines 2021.
Second, while pricing for a traditional IPO is affected by market volatility and broader investor sentiment, which can vary significantly leading up to the time of pricing, SPAC mergers provide more certainty because of up-front pricing and valuation that is in large part determined through negotiations that typically occur months before the transaction closes. The recent rise in market volatility, which is largely attributable to the coronavirus disease pandemic, has therefore prompted some companies to forego the traditional IPO route for the up-front price discovery and potential accelerated timeline offered by a SPAC transaction. Furthermore, SPAC mergers give sponsors the opportunity to raise additional capital through PIPEs to finance a significant portion of the target’s acquisition price and to provide post-merger operating cash.
Life Cycle of a SPAC
A SPAC’s life begins with its initial formation, followed by its IPO, its search for a target, a shareholder merger vote, and, finally, the close of an acquisition (or the return of the SPAC’s proceeds to investors). The SPAC process differs from that of a traditional IPO in that the target company (which eventually becomes the public company post-acquisition) is not involved in the formation of the SPAC or the IPO phases. However, the terms of the units offered in a SPAC IPO and the agreements the SPAC has with its sponsor and management team ultimately influence the value that target company investors extract from a SPAC merger.
The phases of a SPAC’s life cycle are outlined below.
Momentum of SPAC in Asia
There is now a significant uptick in companies in China and across Asia considering a similar route to accessing US capital markets as investors and management teams try to mitigate some of the challenges of traditional US IPOs; in particular market volatility around pricing and the significant investment of management time and cost.
Given market developments in US SPAC listings in recent years and potential merger and acquisition opportunities in the Asia Pacific region, Both Hong Kong Stock Exchange ("HKEX") and Singapore Exchange ("SGX") received increasing market interests to introduce SPAC in their capital markets.
Accordingly, SGX is consulting on a SPACs Framework to introduce a new listing vehicle to the Singapore market. Hong Kong is racing with rival Singapore to become the first Asian hub to green light such vehicles. The Hong Kong Government has directed the regulator and the HKEX to come up with a framework that fits its market as the Asian financial hub seeks to get in on a boom in Asia SPAC deals that has mainly been centered in the US. The members of the Financial Leaders Forum, chaired by Financial Secretary Paul Chan, learnt from HKEX that a market consultation will be held in 3Q21. Yet, after years spent squeezing out shell companies that were seen as a hotbed for pump-and-dump stock manipulation, this is expected that authorities will take a cautious approach.
Ultimately for a long term success for a stock exchange, quality of listed companies, integrity and investor protection are always the most critical factors.
Deloitte China VCPE Program
Tel: +86 10 8520 7412
Deloitte China VCPE Program
Tel: +86 10 8512 5710
Southern China Regional Leader
Deloitte China VCPE Program
Tel: +852 2852 5658