Growing interest in Asia towards blank check companies

The hottest Wall Street trend may be heading to Asia.

SPACs (or special-purpose acquisition companies) are attracting interest in Asia and the first wave of local listings will be a testament to investors ’appetite in the region, experts told CNBC.

“I think there’s certainly interest because SPACs obviously offer this alternative platform for a traditional IPO,” Max Loh, leader of Asean’s IPO in late February, told CNBC in late February. EY.

SPACs are companies of interest 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 the acquisitions are not completed within this period, the funds will be returned to investors.

SPACs are sometimes known 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, as they have existed 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 the SPACs present an “attractive proposal”.

Private companies see SPACs as an alternative way to access the capital market, rather than the traditional IPO route, which can lead to greater time consumption and greater control.

An increasing number of Asia-based sponsors support SPACs.

Asia is also a target acquisition region for many of the SPACs, particularly highly valued Southeast Asian companies that are poised to go public. According to Reuters, the giant Grab, which is involved in attractions, is in talks to make public its merger with a SPAC.

Data shared by analytics provider Dealogic showed that the number of SPAC-focused companies in Asia grew from 0 in 2016 to 8 last year, with revenue of $ 1.444 billion. But only four Asia-oriented SPACs were successfully completed in 2020.

During the first three months of 2021, there have already been six such companies that have collectively raised $ 2.7 billion.

Chew Sutat, head of sales and global origin for Singapore market operator SGX, told CNBC last week that SPACs can provide a relatively easy way 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 companies grow and access global investors through Singapore’s capital market platforms. “Chew said in an email.

The explosive growth of SPACs has focused mainly on the United States, where the market took only three months to surpass its 2020 record. Funds raised by SPACs in the United States this year amounted to more than 87 billion dollars, compared to the issuance of $ 83.4 billion. all last year.

This trend is expected to continue where SPAC ads in the U.S. outperform traditional IPOs, according to Romaine Jackson, head of Southeast Asia at Dealogic.

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

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

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

Asian companies and investors want to drive the SPAC wave, regardless of the change that will emerge as the SPAC hub in the East, according to Bruce Pang, head of macro research and strategy at China Renaissance Securities.

“Asian trade with the domestic market effect has the advantage of providing a playing field with a better understanding of business models and rational ones for sectors of the new own economy as companies thrive and entrepreneurs thrive in Asia he told CNBC.

Having the right rules and methods to execute SPAC listings would be key for Asian stock markets, according to Loy of EY.

When a SPAC raises money, people who buy on the stock market do not know which company will be the target of eventual acquisition. Instead, many investors rely on a track record of success for SPAC sponsors to invest in blank check companies.

One of the concerns 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 proper rules and regulations can mitigate that concern, he said.

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

Pang of China Renaissance explained that regulatory uncertainties remain one of the main concerns of the adoption of SPAC in Asia, as authorities and exchanges must provide popular and convenient forms of regulation.

“Given the cautious attitude of Asian stock markets and the more severe reviews on shell companies, back door listing, reverse acquisition or reverse merger, they are all SPAC-like vehicles that can also allow companies to evade control of the stock exchange and regulatory oversight, stock exchanges are unlikely to complete embrace the SPACs any time soon, ”he said.

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

Loh added that SPACs will provide another alternative platform for raising capital, apart from traditional IPOs, as well as venture funds and private equity.

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