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Asia’s Spac IPOs are best done away from home

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By Jonathan Breen
26 Jan 2021

The Singapore Exchange’s plan to get in on the rush to list special purpose acquisition companies (Spacs) is a bold move that could give it an edge over regional rivals. But there are plenty of obstacles — and its efforts may well be futile.

The Singapore Exchange has long been ambitious about its growth, especially when pitted against the Hong Kong Stock Exchange, its bigger regional rival.

Hong Kong, which is one of the biggest exchanges in the world by money raised, can boast a horde of high-profile technology listings in the past year. Singapore’s unique selling point is less inspiring: it is the listing hub for real estate investment trusts in Asia.

Nanofilm Technologies’ S$510.07m ($384.05m) IPO in October 2020 was the exchange’s first corporate IPO worth more than $100m since June 2017, when HRnetGroup floated for S$174.06m, according to data from Dealogic. Unfortunately for the bourse, it sees far more delistings than new listings.

It is no wonder than that the SGX is pouncing on the opportunity to position itself as Asia’s hub for Spacs.

Tan Boon Gin, head of SGX’s regulatory unit, said this month that the exchange has taken note of how popular Spac listings have become in other markets and has received enquiries and expressions of interest in the asset class. It is now considering a consultation on whether the SGX should allow Spacs.

It is a natural move. Having a workable framework for international listings by blank cheque firms would certainly help boost business on the bourse.

Blank cheque companies, or Spacs, are listed by sponsors — which can range from professional investors such as Bill Ackman to celebrities like US basketball star Shaquille O’Neal — through IPOs. They have no assets or operating record but are instead formed for the sole purpose of making an acquisition. This means investors are betting on the experience of the sponsor and management team to make the Spac a success. It’s a risky proposition but investors have the security of a guarantee that their money will be refunded if no acquisition is made within 18 or 24 months in most cases.

The US is undoubtedly the home of Spacs but last year, there were signs of increasing interest from Asian sponsors in blank cheque companies. There has been a subsequent boom of IPOs by Asia-focused Spacs in 2021, with as many as six already listed and more on the way.

All have floated in New York so far.

There are clear opportunities to bring some of the Asia-focused Spacs to list in the region. SGX sees that and is keen to be the frontrunner. But its efforts are unlikely to prove beneficial – at least not in the near term.

The investors, investment bankers and industry veterans behind Asia-focused Spacs have clear reasons to stick to the US for their listings. New York’s stock exchanges give Spacs access to a large and sophisticated investor base that has plenty of experience with the asset class. The deluge of US Spac listings last year, raising around $75bn, is testament to the capital pool blank cheque companies can tap.

Asia has no credible history with Spacs. The only country to try to create a market for the investment vehicle is Malaysia. But following Bursa Malaysia’s first Spac listing in 2011, a heavy-handed regulator and an unsupportive investor base meant there were only four trading by the time Spac Cliq Energy was liquidated in early 2016.

That was a death knell for Malaysia’s Spac experiment.

The other option for a regional Spac hub would be Hong Kong. It is arguably the best candidate, given it already has a large, liquid stock exchange on par with its peers in New York and London, at least in terms of listing volumes.

But the bourse is unlikely to embrace Spacs anytime soon. Spacs are effectively shells that enable a form of ‘backdoor’ listing — a practice where a private company acquires and merges with a company already trading on a stock exchange, becoming automatically included on the exchange while avoiding the IPO process.

Also known as a reverse takeover or reverse merger, they allow a company to circumvent the regulatory scrutiny that is required to get approval for an IPO.

Reverse takeovers have been abused by firms in the past as a way to list second rate assets while avoiding HKEX scrutiny. This has led to the bourse tightening its review of issuers that appear to be shell companies. It has also introduced a regime for delisting such firms.

Given the similarities between shell companies and Spacs, any change to allow the latter will be slow going on the HKEX.

That is good news for Singapore. But the city-state’s exchange will face big hurdles in attracting Spacs, given the SGX is not known for a diverse, liquid IPO market, nor for a deep pool of sophisticated investors like the US.

Its early step towards making Spacs a reality should be applauded — and may serve as an example for other exchanges in the region. But the eventual outcome may well be disappointing.

By Jonathan Breen
26 Jan 2021