Hong Kong’s relatively high threshold for special purpose acquisition companies (Spacs) listings is welcomed by the market as it tries to strike a balance between flexibility and investor protection.
The city could see its first blank-cheque companies, or Spacs, go public very soon, as the new regime takes effect on Jan 1, 2022, experts said. High-growth companies that are popular with the investing public, such as clean energy, healthcare, and technology — and especially those from China — are expected to be first comers.
The Hong Kong Exchanges and Clearing (HKEX) announced the city’s Spac regime on Dec 17, following public consultation since September.
“Prior to the announcement of final rules, we have already been helping some clients work towards setting up the first Hong Kong Spacs. With the regime set to come into effect on Jan 1, 2022, we hope to see the first Spac listings very soon,” Xiaoxi Lin, Hong Kong-based partner at law firm Linklaters, told AsianInvestor, without disclosing client details.
Hong Kong media reported on Monday that the city’s first Spac listing could happen in March or April at the soonest, with a total of five for early next year, citing people familiar with the matter. The background of sponsors is diverse, from China’s state-owned firms, to investment banks with Spac experience and family offices, the report said.
WAIT AND SEE
A Spac is a shell company formed by wealthy individuals or senior financial executives. It aims to de-Spac, that is to merge with a private company — usually a high-growth startup — that wants to go public under a cheaper and faster track.
“We believe that the introduction of the Hong Kong Spac listing regime can provide the market with another channel besides traditional initial public offerings (IPOs), attracting more companies from Greater China, Southeast Asia, and even the world to come to Hong Kong for listing,” said HKEX’s head of listing Bonnie Chan in a podcast on Dec 17.
A recent high-profile Spac transaction involved Grab, the Southeast Asian version of Uber. It merged with the Spac Altimeter Growth, and went public on Dec 2 on Wall Street. Raising $4.5 billion total, it is the world’s largest Spac deal so far. But its performance has been disappointing: the share price has plummeted more than 40% since its debut.
“Whether Hong Kong can successfully attract a decent number of listings via Spacs, it remains to be seen,” said Martin Hennecke, head of Asia investment advisory and communications at St James’s Place Wealth Management.
He noted that stricter rules could mean less demand from “over-enthusiastic” parties like those that rushed into US Spacs earlier.
“Another challenge is that Hong Kong’s strength obviously lies in [its] proximity to mainland companies, and recently, global investors’ appetite for China, given regulatory risks and relatively weak market performance, might be dented somewhat, both for traditional IPOs as well as Spacs.
“I would hope though that in the long run, both China’s markets, and an understanding of where Spac structures may add real value and where not, will lead to a reasonably steady uptake, where appropriate, rather than another questionable, uncontrolled boom,” Hennecke told AsianInvestor.
He expected early participants in Hong Kong Spac deals to be high-growth names in popular areas such as clean energy, healthcare, and technology.
Hong Kong's final Spac regime comes with lowered thresholds compared to initial proposals. For example, the minimum number of institutional professional investors required for a Spac has been reduced to 20 from the proposed 30. There was also the removal of alignment voting with redemption; and lower and tiered thresholds for minimum constitution of independent private investment in public equity (PIPE) investors.
Replacing the previous requirement on shares redemption with PIPE is likely to make the regime more accessible to a wider range of market participants and facilitate growth of the Hong Kong Spac market, said Linklaters’ Lin.
“One of the advantages of Spacs is that they can cater to the needs of different groups, and the HKEX has recognised that by taking a staggered approach to the minimum PIPE investment requirement, which facilitates utilisation of the Spac tool by companies of different sizes,” he added.
But the regime still sets a higher bar than the United States and Singapore: retail investors are barred from buying Spac shares; the minimum fundraising threshold is higher at $HK1 billion ($128 million) in Hong Kong, compare to S$150 million ($110 million) in Singapore and $50 million in the US; and there are higher bars for people who are eligible to run the Spac.
“The consultation result has taken various industrial opinions and provided more flexibility, especially on de-Spac and warrants. Meanwhile, given investors’ behaviour in Hong Kong and Asia, I think it makes much sense to limit [Spacs] to professional investors, at least during the beginning stage,” said a Hong Kong-based senior executive with an asset management firm.
“In my opinion, Hong Kong’s Spac listing rules are not too stringent, because the Spac structures that surged in popularity in the US arguably are subject to a high degree of conflict of interests and unfavourable terms for retail investors. This has already been reflected in poor performance in the majority of these instruments recently, and in turn led to a significant cooling of the global Spac boom,” said St James’s Place's Hennecke.
“Untransparent and arguably unethical instruments may only provide a boom in the short term, but it is not sustainable in the long run, and would only bring damage to relevant markets and exchanges in terms of its reputation,” Hennecke said.
Echoing Hennecke’s views, a Greater China-based senior investment executive of a large insurance company told AsianInvestor that he thinks Hong Kong needs to be a competitive financial centre, but can’t forego investor protection, particularly with transparency and disclosures.
As Hong Kong lowered some requirements in the final regime per industry feedback, Hennecke thinks investors should still exercise great caution in Spacs, even though investor protection is relatively better here.
“One needs to carefully evaluate individual businesses’ prospects versus valuations and, specifically for Spac structures, carefully evaluate the quality of sponsors, institutional investors, fees, and warrant structures and the alignment of incentives,” he stressed.