Hong Kong still awaits payback from new Spacs regime

Hong Kong’s blank-cheque corporations are touchdown their first acquisition targets however company executives warn that tight guidelines are stifling the risk-taking they’re meant to reward.

Final month heralded the primary Hong Kong particular function acquisition car to shut a deal, merging with Synagistics, a Singaporean ecommerce firm.

The acquisition by the blank-cheque firm, headed up by Norman Chan, former head of the Hong Kong Financial Authority, is more likely to be adopted by two different mergers which are awaiting closing approval from regulators.

Hong Kong authorities regard Spacs, permitted for the primary time in 2022, as a option to reanimate their home fairness market and entice extra worldwide corporations to record within the territory.

Spacs usually look to boost funds by means of itemizing on a inventory market, after which intention to buy a non-public firm, pulling its goal on to public markets — a so-called de-spac transaction.

However executives who’ve been by means of the method are warning that trickle is unlikely to change into a flood.

“Arguably, it’s really extra difficult by way of course of than to undergo an inventory,” mentioned Katherine Tsang, who was an government director of the funding car behind the Synagistics deal alongside Chan. She can be a former chair of Commonplace Chartered in Better China.

After conducting merger talks with a promising non-public firm, “they nonetheless want it to undergo the complete IPO vetting course of”, she added.

The expertise underscores the fragile stability for Hong Kong because it tries to keep up its attractiveness as a global listings hub whereas its market strikes nearer to mainland China.

KPMG estimates the territory is the fourth-largest marketplace for new listings by market worth this 12 months, however the numbers have been boosted by only one firm — the $4bn itemizing of Midea, a Chinese language electronics producer.

China’s sluggish rebound from the coronavirus pandemic has additionally damped inventory market valuations. Hong Kong’s fairness market has obtained a much-needed increase from Beijing’s coverage stimulus launched in September, with the Hang Seng index notching its best week since 1998 upon the information of the coverage blitz.

However the market has since come down as traders categorical disappointment within the mainland fiscal stimulus up to now and hedge the potential injury of a second Donald Trump presidency within the US.

Authorities sought to emulate the Spac growth within the US in 2021, which raised some $163bn for corporations to hunt for deal targets, in accordance with information from Dealogic. The brand new guidelines have been meant as one other route for dealmaking in Asia.

“The fantastic thing about a Spac is that the funds are prepared, and for corporations trying to record on the Hong Kong trade I believe will probably be a gorgeous various to the itemizing path,” mentioned Jean Thio, capital markets companion at regulation agency Clifford Likelihood.

She identified that personal corporations might set up their valuations by means of direct negotiation with an acquirer, somewhat than rely available on the market worth.

“There is likely to be particular curiosity for specialist tech corporations in addition to corporations with out market friends listed on the HK trade,” she mentioned.

Nonetheless, Hong Kong additionally sought to protect in opposition to low requirements: the US growth was broadly seen as resulting in a bubble — with one brief vendor dubbing them “castles in the sky”. Critics of the growth within the US say it enriched Spac founders and advisers whereas usually punishing traders, particularly retail cash.

“I didn’t really feel fully comfy with it [in the US] . . . the promoters have been some unusual characters, baseball stars, with no precise finance expertise performing as promoters,” mentioned Chan.

The laws stipulate that Hong Kong Spacs have to satisfy all the identical necessities as an preliminary public providing. Furthermore, not like within the US, investing in Spacs is simply open to skilled traders somewhat than being a retail cash play.

Solely 5 Spacs have raised cash in Hong Kong because the new guidelines have been launched almost three years in the past, in accordance with Dealogic.

Optimists say Spacs can discover their utility by serving to extra area of interest, or international, corporations record on the Hong Kong trade.

Chan mentioned his firm’s “community”, which incorporates the principle traders within the Spac, would assist the Singaporean information firm entice distributors in Better China who’re concentrating on the big south-east Asian market.

However as Hong Kong strikes nearer to mainland China economically, market members concern the territory’s capital markets are nonetheless overly reliant on Chinese language corporations searching for an offshore secondary itemizing.

“The standard [Chinese] A-share corporations doing secondary listings wouldn’t be capable of do a de-spac,” added Thio.

“In actual fact, any type of Chinese language corporations could be topic to CSRC [mainland Chinese regulator] guidelines and regulatory approvals. It’s one thing that places the timeline into uncertainty.”

One adviser who works on Spac transactions in Hong Kong mentioned they have been uncertain the brand new itemizing avenue would result in any significant quantity of recent corporations itemizing within the territory. 

“Hong Kong has at all times mentioned they don’t like backdoor listings. However [de-]spacs are by definition backdoor listings,” mentioned the adviser, who didn’t have authorisation to talk publicly. 

“It’s no totally different to making use of for a brand new preliminary public providing — you want all of the vetting. If you happen to go searching, the worldwide development is that Spacs haven’t carried out properly. I don’t assume they may get greater sooner or later.”

Synagistics’s share worth has underlined the rising warning. After itemizing it leapt as a lot as 400 per cent from its debut worth of HK$10 ($1.29) per share. On Wednesday it closed down at HK$12.50.