Chinese state-backed financiers, Hong Kong tycoons, Japanese tech giants and more are jumping on the bandwagon to form «blank check» vehicles as the craze of special purpose acquisition companies reaches Asia.

Special purpose acquisition companies (SPACs) are growing at breakneck speeds as high cash holdings and ultra-low rates are pressuring investors to allocate capital while private firms are increasingly looking for exit strategies less cumbersome and costly than traditional IPOs.

SPAC fundraising has already reached $71.2 billion in 2020, according to Refinitiv data, marking a five-fold year-on-year surge.

While Asia has been a limited contributor of demand thus far – Refinitiv data indicates only a dozen SPACs have been backed by financial sponsors based in the region – it is set to benefit from the SPAC experience and optimism developed elsewhere. A recent Goldman Sachs research note said it expects SPAC momentum with up to $300 billion of M&A capital raised in Asia and other markets outside the US. over the next two years.

SPAC Invaders

Although SPACs accounted for more than half of 2020 IPOs in the U.S., it is still in its early stages in Asia and the practice is not allowed under listing rules at exchanges in major hubs like Hong Kong and Singapore.

Still, there are a wave of new regional entrants this year, signaling optimism about the new channel to connect low rate capital with high growth firms in Asia.

Newcomers in 2020 reportedly include Bridgetown Holdings, a $595 million SPAC backed by billionaire tech investor Peter Thiel and Richard Li Tzar-kai, son of Hong Kong’s richest man Li Ka-shing; Citic Capital Acquisition with $276 million; and, most recently, a Softbank SPAC aiming to raise up to $600 million.

Ex-Banker Backing

The craze has not been limited to large entities like financial conglomerates, billionaire tycoons or sovereign wealth funds with former bankers also entering the fray.

U.S. health insurance data firm MultiPlan went public following an $11 billion deal in July via a SPAC backed by ex-Citi banker Michael Klein. More recently, retired UBS chief executive Sergio Ermotti was listed as chairman of Investindustrial Acquisition Corp., a SPAC seeking to raise $350 million targeting businesses in the consumer, healthcare and tech sector.

Timing and Situation: «100 Percent Right»

If done right, SPACs serve a legitimate purpose to provide liquidity to companies that don’t mind a lower valuation in exchange for an exit strategy with lower costs and greater flexibility – a decision that the chairman of venture capital firm Bulb Capital Michael Bornhäusser claims requires «the timing and the situation of the company» to be «100 percent right».

«Otherwise, you risk being part of a hype without getting a proper reward,» he said in a recent essay with finews.asia.

«Great 2020 Money Grab»

But when done wrong, such structures could act as mere channels to raise capital and establish valuations with the cost of going public embedded and shouldered by investors. According to a working paper by Stanford Law School’s Michael Klausner and New York University School of Law’s Michael Ohlrogge, share prices of blank-check firms tend to fall one-third within a year following a merger meaning that «investors are footing the bill for most SPAC costs». 

Muddy Waters Research founder Carson Block called SPACs the «great 2020 money grab» last month and announced plans to short the Klein-backed MultiPlan.

«A business model that incentivizes promoters to do something – anything – with other people’s money is bound to lead to significant value destruction on occasion,» said Block in a report.