Edward Au FCPA (practising), Southern Region Managing Partner, Deloitte China, and Chairman, the Institute’s Corporate Finance Advisory Panel
Special purpose acquisition companies (SPACs) have been one of the hottest capital market topics this year. Interest in SPACs – shell companies created to raise capital via initial public offerings (IPOs) with the proceeds used to acquire operating companies – has surged, with 412 transactions this year so far globally, compared with 248 in the whole of 2020 and a mere 56 in 2019, according to Spacinsider.com.
With such a surge in interest, the introduction of SPACs in Hong Kong is now a possibility, although a rumoured public consultation has yet to materialize.
Some caution is warranted, as the long-term success of Hong Kong’s stock exchange, the quality of its listed companies, its integrity and investor protection should always be held paramount. That said, and assuming mechanisms are put in place to uphold these principles, SPACs would benefit Hong Kong’s capital market in several ways.
Since the launch of the new listing regime by Hong Kong Exchanges and Clearing (HKEX) in 2018, innovative companies have flocked to list in Hong Kong. This, in turn, has increased investors’ acceptance and understanding of companies with vanguard technologies and innovative businesses. However, traditional listings, which focus on historical results, are often not possible for fast-growing new economy companies with substantial earnings upside.
Compared to traditional listings, where pricing is affected by market volatility and investor sentiment, SPAC transactions provide greater certainty, as pricing and valuation are determined up front. They also allow sponsors to raise additional capital from private investors in public equity to finance a substantial proportion of a target’s acquisition price and provide post-merger operating cash. SPACs are also appealing during times of high market volatility, as they allow companies to forego a traditional IPO for upfront pricing and an accelerated timeline.
These factors have prompted a sharp uptick in companies across Asia considering SPAC transactions in the United States, as they seek to mitigate the above-mentioned challenges of traditional IPOs, and the substantial investments of management time and cost such listings demand.
Hong Kong would benefit from becoming a destination for SPAC listings, particularly given the growing number of merger and acquisition opportunities in Asia Pacific. This will also help the development of family offices and private equity funds in Hong Kong that have been setting up SPACs as sponsors to access public markets. So long as the interests of smaller investors are protected, SPACs in Hong Kong would capture new opportunities, benefit capital market participants and become a viable alternative to traditional IPOs.
“Hong Kong would benefit from becoming a destination for SPAC listings, particularly given the growing number of merger and acquisition opportunities in Asia Pacific.”
James Cheng CPA, Investment Director, China Everbright Limited, and member, the Institute’s Corporate Finance Advisory Panel
SPACs recently became a preferred way for many experienced management teams and investors to take their businesses public, in particular since 2019. There’s no doubt that SPAC listings benefit many of the usual players in the IPO value chain – the listing targets, IPO sponsors, lawyers, accountants and so on – but other professional investors and entrepreneurs can also benefit from a Hong Kong SPAC regime.
Professional investors, including angels, venture capital funds and growth private equity funds, consider listing as a common way to realize their investments, and often impose listing obligations on entrepreneurs in their investment agreements.
But these investors love and hate traditional IPOs as an exit route. While on one hand listing a company through an IPO is the most traditional, recognized way of gaining public company status, the road to a successful listing is most of the time full of ups and downs and can take years, often affected by market sentiment and other factors. The longer the process takes, the more likely it will be hit by adverse events. Also, as professional investors measure their returns based on when the cash flows happen, the uncertainty around IPO timing and the time needed for an IPO directly translates to uncertainty around investors’ key performance indicators.
With the SPAC alternative, the listing journey can take as short as three to five months, with increased certainty. This means less risk and better returns at the same time for investors, versus traditional IPOs.
Currently the most likely jurisdiction for a SPAC listing is the U.S., which involves a plethora of considerations: tax, Public Company Accounting Oversight Board audit rules, U.S. Securities and Exchange Commission filing requirements, class action lawsuit risks, just to name a few.
A SPAC regime in Hong Kong will add an important element to the city’s investment ecosystem: an exit route with higher certainty and a shorter listing timeframe. It will remove the considerations around listing in the U.S. and make our city more attractive for investors. And with higher investor-friendliness, entrepreneurs and start-up founders looking for investor capital will more likely find the investors they need in the city.
Needless to say, Hong Kong retail investors are not yet familiar with how SPACs work. Proper education and disclosure will be key to SPACs’ success in Hong Kong.
“A SPAC regime in Hong Kong will add an important element to the city’s investment ecosystem.”
Mason Ching, Partner, Mason Ching & Associates
SPACs, an unknown “creature” in Hong Kong, have shown themselves to be promising investment vehicles in the U.S. Basically, investors put their funds in a SPAC managed by a team of investment experts and the SPAC lists on a stock exchange without any business. Within a time limit, the SPAC has to acquire a business or return the funds to the investors.
Companies with good track records and prospects may not always find it affordable and smooth to raise funds through IPOs in Hong Kong. It is very costly preparing for IPOs because of the high professional fees of a team of sponsors, lawyers and accountants etc.
By the time many regulatory hurdles for the approval of the HKEX and Securities and Futures Commission have been overcome, IPOs may still fall through if there is a lack of interest from investors due to adverse market condition or other reasons. This is a particularly great risk for medium-sized companies. The financial burden of an aborted IPO may simply be disastrous for a company. SPACs offer a good solution as the funding is readily available and can be quickly tapped into without the company incurring huge costs.
Hong Kong is the preferred choice of listing to many companies with great prospects in Mainland China. For companies elsewhere, Hong Kong’s capital market is also attractive. However, in the end, it is the certainty of funding that may decide where companies will go for listing.
The place of listing of a SPAC is fixed at the outset. Therefore, a business getting funding from a SPAC to achieve an IPO does not have a choice when it comes to the listing venue. If Hong Kong does not have SPACs, a potential IPO candidate for Hong Kong will be taken by other capital markets through SPACs. If it does, it can take IPO candidates from competitors.
On the other hand, a few Hong Kong billionaires have already invested in SPACs in the U.S. Meanwhile, Singapore is going to have its first SPAC soon. This new investment vehicle has drawn capital away from Hong Kong and this trend will continue if we do not do anything about it. With appropriate regulatory protection, SPACs may help Hong Kong to maintain its competitiveness as a fundraising hub.
“If Hong Kong does not have SPACs, a potential IPO candidate for Hong Kong will be taken by other capital markets through SPACs. If it does, it can take IPO candidates from competitors.”