Asian stock exchanges seek to join the Spac craze despite governance issues

The Indonesian Stock Exchange has become the third Asian stock exchange, after Hong Kong and Singapore, to explore authorization of special purpose acquisition vehicles, raising investor protection concerns as the Wall Street mania for vehicles extends to the region.

Investors have invested nearly $ 3 billion in Spacs focused on acquiring Asian businesses this year, nearly doubling the amount committed in 2020, according to Dealogic.

Last year, there was only one Spac deal involving a company based in an Asian country, and only five successful listings of Asian start-ups through Spacs in the past five years.

The rush to targets from an expanded pool of liquidity for investors has raised concerns among some sponsors about inflated valuations of young companies, where management teams may not be prepared for the regulatory requirements of a U.S. listing.

It also happened despite efforts by Asian exchanges to tighten restrictions to block backlogs and other transactions that bypass the strict independent due diligence required of a traditional IPO.

“Everyone is pursuing the same deals,” said Frank Troise, managing director of SoHo Advisors, a specialist US investment bank. “In some cases, 12 to 15 sponsors are chasing a target.”

Spacs raise funds by listing on the stock exchange and then using the proceeds to publicize promising private companies through reverse takeovers. Shareholders do not know which companies the vehicles will target and invest based on the records of those who sponsor the Spacs.

Investors poured $ 100 billion into Spacs around the world last year. The trend continued until 2021, with 188 vehicles raise $ 58 billion in the United States only.

Some of Asia’s best-known investors and wealthiest tycoons have entered the asset class, including Ken Hitchner, who ran Goldman Sachs in Asia-Pacific, and Fred Hu, a veteran of private equity in China.

Richard Li, son of Hong Kong tycoon Li Ka-shing and one of the city’s most prominent businessmen, and Peter Thiel, the American tech investor, also backed large acquisition vehicles aimed at to seize opportunities in the region.

Many Spacs are targeting Southeast Asian tech companies, especially after the meteoric rise of New York-listed Sea, a Singapore-based games and e-commerce company and one of the best performing actions Last year.

GM020307_21X Acquisitions of Global Spac

Yet most emerging Southeast Asian startups are valued at less than $ 3 billion, according to bankers and investors, the threshold required to list a company on the U.S. stock exchange.

The level of interest is there for Southeast Asia, but “the amount of targets that are really appropriate is not,” said Ee Ling Lim, regional director of venture capital firm 500 Startups.

Only a few of the Asia-focused Spacs launched this year had local sponsors or sponsors who have already invested in the region.

These include Provident Acquisition, a $ 200 million Asia-focused Spac launched by Southeast Asian fund Provident Growth. The company has backed Gojek, Indonesia’s largest start-up, and Traveloka, another of the country’s four unicorns, or private companies valued at over $ 1 billion.

“There are quite a few unicorns in Southeast Asia already and more next-generation companies are coming, some of which are ready for public procurement,” said Michael Aw, Managing Director of Provident Acquisition.

Beyond Southeast Asia, some Spacs target larger markets, notably India, where companies are considered more mature. Last week, ReNew Power, one of India’s largest renewable energy groups, revealed its intention to go public in New York thanks to an 8 billion dollar deal with a Spac.

The New York Stock Exchange and the Nasdaq are the preferred places for such quotes. But Asian markets are increasingly looking to take a share.

Johnson Chui, head of Asian financial markets at Credit Suisse, warned that the implementation of a Spac framework in singapore, Hong Kong or Indonesia would require “a lot of education” for stakeholders.

Total Asia-Focused Spacs Transaction Column Chart (Billions of Dollars) Showing Global Spacs Boom in Asia

Hong Kong has technology lists captured in the region, but Singapore and regional exchanges, including Indonesia, wondered how to get local unicorns to register locally.

Allowing Spacs would offer companies “another alternative for fundraising,” said Pandu Sjahrir, commissioner of the Indonesian Stock Exchange, adding that companies could then tap into local bond and bank lending markets without currency mismatches.

Indonesia has offered tax incentives for businesses to seek national listings, with the capital gains tax falling to 0.1 percent from 22 percent for those listed locally.

However, the limited history of Asian companies successfully going public through a Spac could weigh on the outlook for the region.

New Frontier Group, an investment firm led by Anthony Leung, former Hong Kong financial secretary, merged the Chinese private hospital United Family Healthcare with its Spac on the New York Stock Exchange in 2019.

But the company has always traded below its initial offering price of $ 10 per share and is expected to be privatized by a consortium led by Leung. The proposed buyout would value New Frontier Health at $ 12 a share.

Sponsors are also increasingly monitored for their lucrative remuneration, typically receiving a 20 percent stake in the business for a nominal amount of $ 25,000.

“Regulators in Asia spent a lot of time reducing backdoor lists because all kinds of people liked them to make quick money,” said a senior investment banker. “Where it collapses is if we have unscrupulous sponsors or companies trying to enter that market.”

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