Family offices divided over the appeal of Spacs
What started as rising interest in Spacs in the latter part of 2020 has grown into a full-blown craze. And Asia's family offices are deciding whether to jump in as well.
Special purpose acquisition companies are essentially paper companies formed by wealthy individuals or private equity firms, which seek to merge with a private company that wants to go public.
The number of Spacs across the world is growing fast. According to data from SPAC Research, 248 Spacs in the US raised $83.4 billion in 2020, more than the combined amount raised in the 10 years prior. This year is even busier; as of March 17, 261 Spacs had raised $84.3 billion.
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HOW SPACS WORK Special purpose acquisition vehicles function by first conducting an initial public offering to raise funds from private investors (like hedge funds, private equity firms and now some family offices). After doing so they have a set time limit to find and merge with a target company, typically two years, or they have to return money to investors. After the private company merges with the Spac, it becomes a listed company, with shares freely traded on the stock exchange. Details on the target are not typically available at the IPO stage, so investors have to rely on the Spac's IPO prospectus and the track record of the Spac management team. Spac advocates say the vehicles provide private companies with a faster and more cost-effective route to gaining a public listing by merging with the vehicles instead of conducting their own traditional IPO. For investors, the key selling point is relatively low downside risk. They can potentially get access to a fast-growing company. And if they do not like the target they can redeem their shares, with interest, before the merger is completed. Investors into the Spac IPO also receive stocks and warrants that can be traded separately - offering an arbitrage opportunity of which hedge funds have been keen to take advantage. Critics of Spacs say their two-year deadline to find a company, and the possibility they will face competition from other financing sources when doing so, carries a risk that the vehicles end up overpaying for any acquisition. |
Spacs are gaining attention in this region too. The financial regulators in Singapore and Hong Kong respectively announced in January and in March that they could allo Spac listings on their respective bourses. Jakarta’s stock exchange has since also jumped on the bandwagon.
In addition, several Asian tycoons have set up Spacs, including Richard Li, the son of Hong Kong billionaire Li Ka-shing, and private equity veteran Fred Hu. And this activity is turning heads among Asian family offices.
“Spac exposure is certainly something RFO offers to clients, our recent investment in Bridgetown 2 Holdings being a prime example," Hong Kong-based Raffles Family Office (RFO) CEO Chiman Kwan told AsianInvestor. The multi-family office managed $1.8 billion in wealth assets as of August 2020.
Similarly, the family office of Hong Kong Billionaire Lawrence Ho, Black Spade Capital, has discussed plans to build a Spac-themed portfolio.
Jakarta-based family office Gunung Capital is also keen. “When we invest in a private equity fund, you usually have a seven- to 10-year period before you get realised returns, whereas for a Spac, once they find a target, the shares are freely traded on the stock exchange,” said director Kelvin Fu.
He said Gunung will target investment returns in “the mid-teens” when it eventually commits to a Spac, but is waiting for the right manager to take the plunge. Fu believes they will ideally be an entrepreneur or have a private equity background.
MIND THE SPAC
On the corporate side, there is also mounting interest in partnering with Spacs. A number of high-profile Asia tech startups are reportedly considering a listing via Spac, including ride-hailing app Grab, real estate portal PropertyGuru, and Indonesian travel unicorn Traveloka. Celebrity endorsements from the likes of Jay-Z have further helped to glamorise the space.
However, the sheer amount of money raised by Spacs relative to the acquisition targets available has led some observers to fret that the market is in a bubble, and vulnerable to a fall in prices.
“When you put all the scepticism together, you see perhaps why family offices are staying away and waiting until the space evolves into something more tangible,” a family office adviser told AsianInvestor. He added that most of the wealthy families in the region with family offices tend to be “old money” and therefore favour the old economy or brick-and-mortar assets.
Others are also wary.
“Of course we are watching that space, but it would probably take us a while to deploy any money,” says Urs Brutsch, founder of multi-family office HP Wealth Management in Singapore. He says one client is “dabbling in Spacs in very small quantities”, but that their rationale for the investment is more Fomo (fear of missing out) than a conscious, strategic decision.
“Because Hong Kong doesn’t have that, the Hong Kong Stock Exchange takes a much more paternalistic view with respect to listing candidates,” said Marcia Ellis, global chair of private equity at law firm Morrison & Foerster (MoFo).
Clarity over regulatory oversight and investor protections will likely be prove vital if budding family office interest is to become full-blown support.