Letter from Asia: Spac gold rush lures region’s unicorns to New York

Dear readers,

The inscription at the Statue of Liberty reads “Give me your tired, your poor, your huddled masses”. To that, Wall Street adds “and give us your Asian growth businesses seeking steep valuations”. Underlining its financial dominance of tech practically everywhere except China, the US has become the venue of choice for ambitious Asian tech groups.

The trend is epitomised in the plans of superapp Grab to join Nasdaq. This would be the world’s biggest deal involving a special purpose acquisition company (Spac). South-east Asia’s most valuable start-up hopes to list through a reverse merger with Altimeter Growth in the US.

The deal values the equity of Singapore-based Grab at almost $40bn. That would be more than double last year’s $14bn private valuation of the company which is rooted in ride-hailing.

Most Spacs, including those whose sponsors and target companies are based in Asia, have listed in the US. Of the total $60bn raised in the first two months, the proportion of Asia-focused Spacs are growing. At about $3bn, the amount is already double last year’s total.

The listings may be in the US, but many of the investors are Asian. Japan’s SoftBank and its Vision Fund have backed several Spacs starting with its SVF Investment Corp on Nasdaq. Chinese investment manager Citic Capital was the first state-owned company to raise capital through a US listing last year. About half the funds that went into these listings originated from Asian investors.

New York Spacs give ambitious Asian unicorns a way to list that is lucrative, prestigious and convenient. More than 400 Spacs are on the hunt for a target start-up to merge with. South-east Asian candidates include Grab’s Indonesian rival Gojek and ecommerce group Tokopedia.

Cynics see high-priced Spac deals as proof that government and central bank support for economies has created asset bubbles.

Asian stock exchanges cannot help feeling jealous, all the same. For decades, Spacs and other “backdoor” listings have been highly regulated and discouraged due to fears they could bypass investor protection regulation.

Spac deals have a poor image in many parts of Asia. There is a deep-rooted association with penny stock scams involving lossmaking shell companies in the 1990s. Spacs were a popular way for speculative businesses to raise funds before the dotcom crash.

Asian exchanges are still weighing up whether to join the global trend. Hong Kong market regulators are expected to unveil a Spac listing framework later this year. Singapore and Indonesia’s exchange watchdogs are also considering updating guidelines.

Conditions for sponsors are likely to be stricter than in the US. The proportion of retail investors trading Spac shares is high at about 40 per cent, more than double what is typical.

As in the 1990s, most Spac-listed groups are lossmaking. Grab is a case in point. It posted a loss of $800m on an ebitda basis last year despite unprecedented demand for food delivery services.

Fund flows into Spac listings remain strong by historical standards. But signs of cooling have started to emerge. Shares in the Altimeter Spac rose a relatively modest 10 per cent on Tuesday, reflecting a decline in the last half-hour of trade. Gains of about 30 per cent were common following announcements of Spac deals last year. The benchmark Ipox Spac index is down a fifth since a February peak. Regulators have stepped up scrutiny.

Historically, the long-term performance of Spacs has been disappointing. Shares have traded substantially better pre-merger than post-merger, says Bain. Spacs have underperformed traditional listings by more than 50 percentage points in the past five years.

Asian exchanges are unlikely to loosen rules on Spacs until next year. That means they may miss the gold rush. It could also spare them the embarrassment of hosting listing by companies whose shares crater if monetary stimulus abates and corporate losses persist. Asia’s bourse bosses would then conclude that New York was very welcome to take in their ambitious Spac refugees.

Enjoy the rest of your week,

June Yoon
Lex writer