Hong Kong should be cautious before embracing SPACs
- It is the latest investment fad, but city’s regulators would be wise to wait for a while before joining the special purpose acquisition companies bandwagon
SPACs are all the rage in the investment world these days. Now Hong Kong wants a piece of the action. But before the city goes head over heels on these special purpose acquisition companies, it’s useful to recall that they also are known in the industry as “blank-cheque” companies.
Financial Secretary Paul Chan Mo-po is right to ask the city’s securities regulator and stock market operator to study the feasibility of allowing SPACs to raise capital in Hong Kong. Chief among their concerns is investor protection.
SPACs became a buzzword in the United States last year when several powerful investors, private equity owners and celebrities such as hedge fund billionaire Bill Ackman and former US House Speaker Paul Ryan used the vehicles as an alternative to public listings to avoid the risk and uncertainty of an initial public offering (IPO).
Now, the City of London and Singapore are eyeing the market. Hong Kong is tempted, too. It may want to think twice, though.
The concept of SPACs is not new, but they have become an investment fad. Their attraction is that those behind one can attract and use investors’ capital to assemble financial war chests to buy assets, typically unlisted companies, with minimal constraints, hence their moniker as blank-cheque companies.
They have been criticised for their opaque structure, where managers, usually the founders, can collect high fees to find a target and complete a deal. Now, many such blank-cheque companies have turned to Asia to seek funding and takeover targets.
Bridgetown Holdings, backed by PayPal founder Peter Thiel and Richard Li Tzar-kai, tycoon Li Ka-shing’s younger son, raised US$595 million last October on the Nasdaq market. Adrian Cheng Chi-kong, third-generation scion of New World Development, is poised to list a SPAC to raise up to US$345 million with an initial public offering on Nasdaq, according to a filing with the US Securities and Exchange Commission.
It remains to be seen whether SPACs will figure as a financial innovation serving a genuine need, or go the path of junk bonds, subprime mortgages and collateralised debt securities.
With few restrictions, a SPAC founder can freely target businesses in any industry, market or country. Chan has rightly hinted there needs to be proper investor-protection guidelines before seriously considering allowing SPACs in Hong Kong.
Hong Kong may allow listings by SPACs amid global deal making frenzy
The city has been the world’s top IPO destination in seven of the last 12 years. There are enough listings coming to the city such that it won’t be losing out by not joining the SPAC bandwagon.
There are enough froth and flaws in the local market that require more urgent attention from the regulators. If New York, Singapore and London want to take the lead, that may not be a bad thing.
