SPACS flourished in the United States, can they grow big in Asia?

A Special Purpose Acquisition Company (SPAC) has, in fact, been around for many years, but only quite recently, especially in 2020, became the latest craze on Wall Street. While the unprecedented growth of SPACs has mainly occurred in the US, a growing number Asia based sponsors support SPACs that have broader implications for the US economy and this growing new ecosystem.

There is over $115.6 billion raised through more than 400 SPAC companies in 2021, mostly on Wall Street, where SPACs account for two-thirds of all (IPOs) although activity has slowed as regulatory and valuation concerns have increased. By contrast, in 2021 a total of $1.18 billion was raised through six SPACs by emerging market issuers, including two each from Israel and China. This is just a fraction of the $96.3 billion raised through traditional emerging market IPOs, based on Refinitiv data.

Why invest in a SPAC?

So why are SPACs so popular? In short, this comes down to time and cost. Private companies and/or start-ups that want to raise capital can do so in a streamlined process, SPACs typically have two years from their IPO date to complete a merger. So why spend months or years chasing investment banks and potential investors in pursuing an IPO, when you can enter into a SPAC and become a publicly traded company as part of the deal?

Because of the lower cost of going public through SPACs, many newer companies are able to trade faster on the Nasdaq Stock Exchange or New York Stock Exchange and immediately tap capital markets for future growth. Unsurprisingly, then, the number of publicly traded companies in the US rose in 2020 for the first time in 20 years, with the help of a huge number of SPACs.

The second most important benefit of young companies going public through SPACs is the exceptional knowledge transfer and mentorship they have gained. SPACs are typically opaque to the public, but they are an essential part of a company’s strategy for acquiring a high-growth company.

Hard lessons learned and best practices

Like all IPOs, companies that go public through a SPAC are still very much in a gamble on the future. However, as the market has learned, some companies can fail and investors may need to go back to the drawing board before making another investment decision. This price action also tells us that investors should do their due diligence and not rush into a SPAC deal. In addition, regulation and oversight around SPACs is needed as this industry evolves to ensure transparency. Another important part is making sure the sponsor puts personal capital into the deal to have skin in the game. These actions help minimize risk and ensure that the company’s forecasts are accurate and give investors a greater sense of confidence. Finally, price discovery should be more detailed and transparent. This gives investors a better understanding of how the deal is structured and what factors contributed to the pricing.

In terms of a global landscape, the SPAC boom provides a path for foreign companies to list and thus contribute to the U.S. market and economy. The SPAC boom strengthens New York’s leading position as the world’s foremost financial center. The hundreds of successful SPAC listings are the envy of the exchanges in London, Hong Kong or Singapore. Many foreign exchanges hold meetings to learn about SPACs in the US and try to emulate their success. Edoc Acquisition Corp [NASDAQ: ADOCU] according to CEO Kevin Chen and CFO Christine Zhao, it wants to leverage its own physician networks while preying on a target in the US or Chinese healthcare sector. The rapid development of SPACS in the US is a great model for other countries, especially in Asia, to learn from, says Kevin Chen. At the same time, any booming industry will also attract unsavory characters, and SPACs are no exception. In addition, given historical cases such as the Lucky Coffee scandal or even the most recent crackdown by the Chinese government against Didi Chuxing listed in the US, it is imperative that investors be vigilant about doing their due diligence and understand the current geopolitical environment between the US and China. Other concerns on SPACs pointed out the complexity of the way they are structured, as well as the compensation arrangements; that combined with the fear of a SPAC bubble. Other analysts believe there is a fundamental conflict of interest because both the sponsor and the target company are not going to come up with information as quickly. In addition, some SPACs have acquired target companies at excessive valuations, while other SPACs may have offered disproportionately generous rewards to sponsors. It is also important to note that after the big SPAC wave of 2020, the SPAC ecosystem has since slowed down significantly and even came to a standstill at one point. After the SEC announced in early April 2021 that it was considering new guidelines for SPAC IPOs, the number of new SPAC issuances fell by about 90%. That said, the hundreds of SPACs that hit the market in 2020 and early 2021 are still on the market and looking for targets. Typical challenges related to lock-ups, over-optimistic growth forecasts by management, can also be said about many SPAC companies. But as the Chinese proverb says: a blemish does not obscure the shine of the jade.

The SPAC ecosystem in Asia

According to statistics from Dealogic, eight Asian company-sponsored SPACs raised a total of $2.3 billion as of February 18 this year. The amount is small compared to what US companies have raised. But it has already surpassed the total that SPACs raised in the region for the full year 2020. More issuance is expected, especially from private equity firms, according to bankers. Primavera Capital Acquisition Corp., funded by a private equity fund led by Fred Hu, a former chairman of Goldman Sachs Group Inc.’s Greater China unit, was recently listed on the New York Stock Exchange for $360 million.

They have all flocked to the US, where investors are pouring money into blank check firms because major exchanges in Asia don’t list such companies. The explosive growth of SPACs is mainly centered around the US. Financial centers such as Singapore and Hong Kong are also investigating ways to list SPACs, but there is no concrete indication when companies will be allowed to list on their exchanges with blank checks.

A concern among investors is whether the same scrutiny and due diligence will be applied to target companies as traditional IPOs. Having good rules and regulations can partially reduce that worry. In addition, regulatory uncertainties remain one of the major concerns in the adoption of SPACs in Asia, but as the SPAC environment in the US develops and matures, it will be a good road map and best practices for Asia. This can make it easier for valuable, reliable Asian companies to list in the US and add to the market in a long-standing, haphazard fashion for all stakeholders involved.

About the Authors:

Count Carro has over twenty years of experience in the private sector and non-profit organizations. He is an adjunct professor at NYU and he is currently a board member of The Global Institute of Financial Professionals and chairs the investment committee of the Association of Diplomatic Studies & Training and a member of the National Committee on US-China Relations.

Special thanks to Kevin Chen, Chief Economist at Horizon Capital, Owakhela Kankwende, MS Candidate in Business Analytics at Fordham University, Gabelli School of Business and Jeeho Bae Senior Research Analyst at Pivotal Advisors who assisted with research and contributed to this article.