Ticking clocks, clogged PIPEs, China's listing crackdown, and Singapore’s big news are the talk of the Asia SPAC forum
Over 500 virtual attendees included senior management of VC- and PE-funded private companies from Greater China, Southeast Asia, and India, SPAC sponsors, private investment in public equity (PIPE) fund managers, investment banks, and SPAC advisors. It was auspicious timing for a conference focusing on the potential of SPACs in Asia as more than 400 SPAC IPOs are currently racing to secure targets, and Asia is home to many of the world’s fastest-growing economies with companies embracing a wave of digital innovation.
“This conference is the intersection of the most talked-about trend in the capital markets — the special purpose acquisition company — and the most dynamic region of economic growth in the world, Asia,” said Drew Bernstein, Co-Managing Partner at MBP, in opening remarks. “The SPAC boom is poised for continued growth within Asia, and management teams and dealmakers are navigating regulations to maximize the open window.”
A few short years ago, Bernstein recalled, SPACs were the “red-headed stepchild” of the IPO market, with barely a dozen deals executed a year. That abruptly changed in 2020, when SPACs offered a much-needed outlet for investors seeking the combination of the safety of capital and the potential to be part of a hyper-growth story during the COVID lockdown. Likewise, target companies were pleased to gain access to massive amounts of capital, and PIPE investors welcomed high-growth opportunities that played on attractive themes in the market.
A “Ticking Clock” Driving SPAC Deal Making
That said, a clock is decidedly ticking - both for SPAC sponsors and private companies.
Jason Edwards, the founder of VentureCap Insights, explained that many venture funds are reaching the end of a lifecycle and aggressively seeking exits. “There are hundreds of venture-backed companies in Southeast Asia. SPAC targets have already been approached by several SPACs, largely because many of them invested more than five years ago, and funds’ lives will soon come to an end.”
The Bootcamp provided education for key market participants on how to structure transactions that work for companies, deal makers, and public market investors. On the short side, what was expected to be a contentious exchange between one of the leading SPAC short-sellers – Dan David of Wolfpack Research and Perrie Weiner, a litigator with Baker McKenzie representing companies accused of wrongdoing — instead offered strong consensus on the importance of accurate disclosure and financial controls.
Five diverse panels of SPAC experts included highly experienced SPAC sponsors, legal experts, leading underwriters of SPAC IPOs and PIPE placement agents, and senior representatives from both NASDAQ and the Singapore Stock Exchange (SGX). Moderators included Crystal Tse of Bloomberg and Cindy Huang of S&P Market Intelligence.
Singapore Stock Exchange “Weeks Away” from Launching SPACs
Singapore is weeks away from launching its own SPAC product.
Ronald Tan, Vice President of Listings at SGX, explained that Singapore views the SPAC as “very applicable” in the Asian regime and is currently drafting rules to allow private equity funds to de-SPAC portfolio companies. When pressed by the moderator, Crystal Tse, to clarify a timeline for SGX’s SPAC launch, Tan estimated weeks rather than months and specified that SPACs would first need to cater to the Asian market.
“These are exciting times,” Tan said, exuding optimistic energy shared by most panelists. John Lee, Head of Greater China Global Banking at UBS, noted that Hong Kong’s financial secretary publicly expressed support for SPACs on Hong Kong markets. Lee promised the option “will be available in one form or the other” for corporations in Hong Kong.
“The Hong Kong market is very open to new products,” opined Lee. “We’re also very mindful of making sure that we protect retail investors, so stay tuned. It will take us more time than Singapore to find the right SPAC structure.”
SPACs “Here to Stay” Despite Regulatory Pressures
SPACs continue to dominate U.S. markets, explained NASDAQ Senior Vice President Bob McCooey, who noted 2020 to be the biggest year for SPACs, eclipsed only by the first quarter of 2021.
“My father used to say, ‘success breeds success,’” McCooey continued, “and the market feels very strong for SPACs. These companies are coming from a variety of sources. Most recently in the news is Virgin Galactic, a SPAC from 17 months ago, followed by DraftKings. Earlier this year, we had SoFi and EV car companies like Fisker, Faraday, Lucid and Nikola, and Horizon. It feels like [SPACs] are here to stay.
That said, McCooey was quick to note that America doesn’t “own” the SPAC product, predicting a significant worldwide increase in SPAC deals. Take, for example, the largest-ever SPAC merger completed in April, ride-hailing giant Grab’s record-setting SPAC merger with Altimeter Growth Corp., valued at nearly $40 billion. The deal shined a “bright, hot spotlight” on Southeast Asia for U.S. SPACs, McCooey said, noting “investors are increasingly recognizing this to be a viable, opportunistic product that people want to get involved in.”
New Chinese Listing Regulations Source of Uncertainty for PRC Deals
Another key takeaway from the Bootcamp concerns recent changes to Chinese overseas listing regulations creating uncertainty about merging with PRC-based targets. Experts suggested that some may rush to embrace the SPAC route to go public before any new rules take effect.
When asked how the recent changes might impact SPAC targets based in the PRC, Morgan Stanley Managing Director Kristin Zimmerman said it remains to be seen how guidelines will be applied.
“There are a number of unicorns coming out of Asia — and China in particular — that may raise a flag to regulators that these businesses are going overseas in the form of a SPAC transaction,” Zimmerman noted. “Even though it’s not necessarily a change of control, it’s still something that’s getting listed on a U.S. exchange. So time will tell, but I suspect that some of these announcements may come to the attention of the broader political agenda.”
Given that any level of uncertainty is a red flag, suggesting a higher degree of risk, Chinese regulations will likely steer jittery sponsors away from PRC targets, warned Stephen Canner, a Partner at Baker McKenzie. Given the glut of SPACs in competition to find appropriate targets, he envisioned a robust marketplace for attractive targets regardless of where they are located.
Touching on Canner’s point, Steve Kaplan, Managing Director and Head of Capital Markets at Ladenburg Thalmann & Co. Inc., reminded attendees of the time crunch to complete SPAC transactions. “No matter how good the target looks, you need to de-risk that transaction to make sure there are no regulatory hurdles. If you’re a sponsor team, you better be very, very careful going down a path where you can get shut down by regulatory bodies outside of your control.”
Preparation Key to De-SPAC Success
SPAC sponsors in attendance leaned in during the insightful panel discussion about best practices for “getting SPAC ready” and what sponsors should consider when pursuing a SPAC Merger. Rajiv Shulka, Chairman & CEO of Constellation Alpha Holdings, emphasized the importance of ongoing investor communications and crafting a compelling story.
“The first audience is your own team and board, which needs to approve the transaction,” he explained. “The next audience is your PIPE investors, composed of domain experts who are specialists in that field. The third audience is the research community that will cover the stock to convey the message of the company to Wall Street. And then finally, you have the broader investment community comprised of a range of sophistication levels for whom you must convey the story in the simplest terms possible.”
In U.S markets, he added, investors expect regular communications with the companies and are used to active dialogue with target companies.
Shulka suggested a line of due diligence questions when considering SPAC targets:
Are shareholders cashing out or helping the company grow? Is it primary capital or secondary capital? Typically SPAC deals with large secondary numbers don’t work, he noted, because investors don’t like the idea of backing a company where shareholders are running for the hills.
“We also look at lockups and incentive compensation linked to performance. The closing conditions of the deal itself sometimes become very interesting, and a key closing condition is often the minimum cash required to close,” he explained.
Clogged PIPEs for Massive Flow of SPAC Mergers
The highly congested PIPE market went from $15 billion in February to $4 billion in May, and PIPE funds are currently seeing as many as 60 meals a week.
“There is a mismatch, and it’s going to take a while to work through the indigestion of recycled capital,” predicted investor relations expert Crocker Coulson of AUM Media, pointing to 430 funded SPAC IPOs yet to announce a target. Essentially, this means that nearly every day over the next 18 months, a SPAC merger with a PIPE will need to be announced. “That’s an awful lot of capital,” Coulson said, estimating that if all the deals were completed, it could result in a trillion dollars of market capitalization.
There was a time when most SPACs closed mergers without any PIPE component to bolster the balance sheet, but over the past two years, the PIPE has been a standard feature of most SPAC deals. Selina Cheung, Co-Head of Asia ECM, UBS, was asked to comment on factors driving this change.
“Having PIPES in these transactions is helpful because, in the past, it was harder to find third-party benchmarks for a valuation for the transaction,” she explained. “More recently, we’re seeing a lot of additional capital that has fueled the recent SPAC search and important PIPE investors to benchmark the valuation for a public market.”
Coulson called the PIPE-SPAC combination a “significant innovation,” as it provides minimum committed capital that companies know will be there. Also, having a PIPE will help address potential redemption pressure, she added, since strong PIPEs can validate a story being told. Further, strategic participants embed deeper into the ecosystem, providing further validation and credibility to the business model.
The key advantages of investing in a SPAC merger through a PIPE as opposed to waiting to buy the shares on the open market) comes down to the size of the position and increased insight, noted Ted Chen, Founder and Managing Partner at Carnegie Park Capital LLC, since PIPEs allow investors to understand businesses better.
“The benefit of the PIPE process is that you have much more of a dialogue with the management team than you would ever have,” he explained. He acknowledged indigestion as mentioned above but noted the “many reasonable assets available.” Despite increasing demand for PIPE capital, it is primarily tied up in Q1 deals, many of which will close in the third quarter. As such, he predicts a “much healthier” PIPE market heading into Q4.
SPACs to Make Their Mark in Asia
Panelists were asked to speak to the long-term role of SPACs in Asia.
“It really depends on how the SPACs that list over the next 18 months progress,” Edwards insisted. “If the SPACs that list from Southeast Asia go well, we’ll see SPACs continue for the next five years at least.”
Lee agreed that the SPAC is here to stay, calling it “very encouraging” to see multiple exchanges adopting the product. “There will be ups and downs in the market and ups and downs in the product itself, but I believe that SPACs are here to stay for a long time.”
Tan called SPACs a “bridge” between U.S. capital markets, European markets, and Asian markets, allowing Asian sponsors to more easily enter the U.S. and vice versa. “The key, we believe at the Singapore Exchange, is to be as global, international, and inclusive of as many markets as we possibly can. This will lead to a bright future in SPACs for all of us globally.”
Perrie Weiner of Baker McKenzie suggested that SPACs are entering into a new stage of their evolution after the SPAC 1.0 and SPAC 2.0 that caught fire in 2020.
“SPACs are changing again, and we are beginning to see the emergence of the SPAC 3.0,” Weiner predicted. “In this iteration, proven SPAC managers or seasoned industry operators seem to have an edge in attracting capital. Warrant structures are being simplified. Incentives are becoming more closely aligned. Due diligence and disclosure are the new watchwords. And valuation once again seems to matter.”
Ups and downs aside, McCooey is bullish on SPACs, which are “clearly” here to stay. “There’s plenty of supply right now. We’re excited about the opportunity, especially in Asia.”