The craze for special purpose acquisition companies is spreading to Asia. And just like the US, some observers worry that what is rational exuberance today could lead to excess tomorrow.
Ray Zage, founder of Tiga Investments, a Singapore-based firm and the longtime head of Farallon Capital’s Asian business, is preparing to launch what could be the first of several Spacs.
Mr Zage, among the most low-key but well-respected investors in the region, has become one of a growing number of sponsors in Asia to create a Spac. Backers of such “blank cheque” firms eventually acquire an existing company with their investors’ money.
These structures have been around for several decades. But it is only recently that they have become feverishly hot. So far this year, Spacs coming to the US market have raised $37bn, far surpassing last year’s previous record of $13.5bn, according to data from Credit Suisse.
The drivers of the Spac surge in the region are basically the same as on Wall Street: low interest rates and markets awash in central bank-bestowed liquidity, which has given rise to a desperate search for yield among investors.
Sponsors are bullish, as you would expect. Many of them say Spacs are among the most solid classes of assets around, since investors have the right to vote on takeovers and can get their money back if they disprove of a deal. Spacs also offer investors relatively short holding periods, as most vehicles are wound up in a couple of years if they fail to find a target. That is very different from the traditional private equity model, for instance, that asks investors for cash, requires them to lock it up for 10 years and gives them no say on investments.
But to critics, Spacs are part of a frenzy that may end in tears, with shareholders’ funds squandered on overpriced targets. One underwriter says he worries “that if too many bad deals get approved in the euphoria, it will give Spacs a bad name when the problem is the company that is the target, not the market itself”.
Niron Stabinsky, head of Spacs at Credit Suisse in New York, says that investors these days can draw comfort from the “blue-chip” people and firms attached to such projects. Previous mini-waves of Spacs in the region had “no-name sponsors” and “no-name companies — and most of them went to zero”, he says.
The first really A-grade sponsor in Asia was Antony Leung, a former finance secretary of Hong Kong and an ex-Blackstone executive in the city. Two years ago, Mr Leung raised a $1.5bn Spac on the New York Stock Exchange, telling investors he aimed to find either a healthcare or a tech firm. His ultimate target turned out to be a mainland hospital chain, United Family Health, which he bought from private equity firm TPG and Fosun, the Chinese conglomerate.
Mr Leung inspired other big-hitters in the region, including Citic Capital, which launched a Spac in February this year and is now looking for targets in green-related areas. “We wanted to leverage our brand and boost our returns,” says Yichen Zhang, Citic Capital’s chairman and chief executive. “We are open to everything, consistent with our themes.”
Many Spac sponsors are particularly keen on tech — at a time when US-China tensions have had a chilling effect on venture-capital fund flows across the Pacific, and when numerous Asian tech firms are suffering from what some VCs describe as “the SoftBank hangover”. They are alluding to a series of deals struck by the Japanese conglomerate at high prices, which has given rise to considerable hand-wringing both among VCs, who fret about paying too much, and company founders worried about the dreaded “down round”.
SoftBank’s Vision Fund “was massive and helped other investors to be larger and bolder for a period of time, but it feels as if this has now peaked, at least in the near term,” says one Spac sponsor.
For now, it can be hard to bridge the gap between the prices that founders want to receive, and those Spacs are prepared to pay. One would-be buyout by a Spac of a tech “unicorn” in south-east Asia recently fell through after the founder baulked at a big fall in value from his last capital raising.
In that sense, many founders see Spacs as the solution to their dreams of achieving an exit. It is up to investors in those Spacs to ensure that rising competition among sponsors does not lead to a loss of discipline — and that the old excesses do not emerge.
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