Drew Bernstein
Four special purpose acquisition companies (SPACs) headquartered in Hong Kong carried out an initial public offering in the United States this year.
Highlights from a keynote speech on ‘IPO Success Factors for Tech Companies from Greater China’ at the Cyberport Venture Capital Forum
For those unfamiliar with the term, SPACs, also known as ‘blank check companies’, seek to pool money from investors with a plan to acquire an existing asset. For example, it could be a company whose existing investors are looking for an exit and would be happy to sell their interest. For companies, it gives them a convenient method of getting onto an exchange – SPACs are already listed on stock markets through an initial public offering (IPO) – and it gives the people backing the SPAC a chance to quickly get exposure to an emerging trend like the stock market bull run experienced by technology companies this year.
So that means that four different groups – the company, the investors in the company, the SPAC and their investors – could potentially get what they want.
There have been 169 SPAC IPOs this year, according to SPACInsider. Last year, there were just 59. Clearly, there has been a reawakening. Similar trends were observed after the financial crisis. Some have questioned if the SPAC craze has become a mania with SPACs accounting for nearly half of total proceeds in the United States in recent months. At a time of great uncertainty about economic fundamentals, it’s understandable why SPACs are attractive. On the one hand, if an investor in a SPAC doesn't like a deal (a target company that it seeks to buy), they can always elect to redeem their shares for the cash held in trust.
Could more Hong Kong-based SPACs emerge in the future? I think that the investment community in Hong Kong has a great perspective not only on opportunities in Hong Kong and China but also on the rest of Asia, a region rich with targets that could be attractive for a SPAC.
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Bridgetown, a SPAC led by Peter Thiel that raised $550 million last month, is already on the lookout for tech, biotech and media deals in Southeast Asia. A SPAC might be an attractive alternative for companies with a strong growth profile but where the local markets do not support high valuations nor have the analyst expertise. Right now, more than $60 billion is currently sitting on the balance sheets of SPACs that have gone public. It needs to be invested within the next 18-24 months or it will have to be returned to shareholders – that is a huge pool of capital to put to work!
On the other hand, it's a chance to get a stake in a promising private company in the way you would through a private equity or venture capital fund but you can cash out whenever you are ready instead of staying put for a long-term horizon.
Ultimately, what matters is the potential for successful exits. A SPAC may purchase a promising company but can you get your money back easily? All venture capital funds know they need a ‘home run’ IPO that will make up for investment theses that did not quite work out or where returns were modest. SPACs have a lower margin for error.
From that perspective, high-growth technology companies in China are in an enviable position. Not only do they now have multiple exit avenues available in Hong Kong, the United States or Shanghai, there is a real hunger for China-based assets among international investors. That is one of the factors why venture capital and private equity funds are raising money in China.
A lot will also depend in the long-run on how these new public companies (bought by SPACs) from China and Hong Kong execute their business plans and whether they maintain high standards of financial reporting and governance. Investor confidence is a fragile commodity.
In my experience, most companies from China take the money when they can get it. They would be open to a SPAC buyout. If the window is open and they can raise public capital at the desired valuation, there is no hesitation. I don't see a lot of ‘IPO shyness’. It is up to their advisors to provide accurate advice on the market appetite.
At the same time, companies from the region perpetually underinvest in IPO readiness. They take short cuts in their accounting and finance teams, internal controls and the governance processes that come back to bite them later.
We have rarely done financial diligence or commenced an audit of a Chinese company and not been surprised! The competitive environment in China is so intense that founders often engage in non-standard transactions and pivot their business plans. Often, what is penned down on paper does not correlate with how the business is run. A big part of our job is to get what is written on paper and what is recorded on the books to align with the business reality on the ground. (There are always twists and turns that you would not expect.)
It is incumbent on venture and private equity investors to drive home that message of public market preparedness. Really, the day you list is just the starting gun for the race.
There may just have been four SPACs from Hong Kong for now. There is no reason why there may not be more in the future. Regardless of how capital is raised, the financial advisory community is ready to help.
Drew Bernstein is the Co-Chairman of Marcum Bernstein & Pinchuk, accounting, and consulting services to Chinese companies listed in the US capital markets. He gave a keynote speech on ‘IPO Success Factors for Tech Companies from Greater China’ at the Cyberport Venture Capital Forum, November 3-4, 2020.
