Heightened oversight of foreign listings by China’s tech unicorns and an uncertain regulatory environment could weigh on the pace of deals by special purpose acquisitions companies (SPACs) seeking to acquire Chinese companies as they deploy huge financial war chests raised in the past year, according to deal makers and sponsors.
So-called blank-cheque companies raised more than US$105 billion in the first half of this year and sponsors – both based in Asia and in the US – have been increasingly turning their attention to targets in Asia, particularly growth companies in China, as the marketplace has become more saturated. China is home to two-thirds of Asia’s tech unicorns.
However, a new slate of draft rules announced last week by the Cyberspace Administration of China (CAC) threatens to slow the rate of US listings by Chinese tech companies – and attractiveness of those companies to American investors.
It is early days, but it is possible the new regulations could weigh on acquisitions of Chinese companies by blank-cheque companies, according to Kristin Zimmerman, who heads Morgan Stanley’s SPAC M&A practice in New York.
“There are a number of unicorns coming out of Asia and China, in particular, that may raise a flag to the regulators that these businesses are going overseas in the form of a SPAC transaction,” said Zimmerman, who was speaking at a “Asia SPAC Management Bootcamp” workshop last week. “Time will tell, but I suspect, as you see some of these announcements come to fruition, that may raise the attention of the broader political agenda.”
SPACs do not have an existing business, instead they are created purely as a vehicle to raise funds and buy assets within a specified time limit, usually two years. They have been seen as an easier path for some companies, particularly pre-profit emerging technology firms, to go public and are primarily listed in the US.
Asian sponsors and target companies have remained keen on the investment vehicle,
even as fatigue set in this spring among institutional investors following a frantic period of fundraising in the first quarter. The US Securities and Exchange Commission also raised questions in April about the accounting for stock warrants
common to most SPAC deals, leading to a pause in what had been one of the hottest fundraising trends
in the past two years.
“With respect to SPACs merging with Chinese companies, it will unquestionably have a very significant dampening effect,” said Peter Kuo, the CEO of PTK Acquisition Corporation, a SPAC backed by the China CEO of VIA Technologies and the chief strategy officer of Apple supplier Foxconn Technology. “I think larger companies will be reluctant to be sticking their heads out in this environment.”
Beijing unveiled new draft rules to review foreign listings by Chinese technology platforms following Didi Chuxing’s
US$4.4 billion initial public offering in June. Photo: Bloomberg
Under the draft rules, the CAC, China’s top cybersecurity regulator, would review any foreign listings
by technology platform companies that possess the data of at a least 1 million users. That is a small hurdle for a country with a population of more than 1.4 billion
The proposed rules followed a series of data-security inquiries of Chinese tech companies that recently listed in the US following Didi Chuxing’s
US$4.4 billion initial public offering, the biggest by a Chinese company in the US since 2014.
The crackdown has prompted dozens of Chinese companies who have filed for US IPOs or are prepping for such listings to put their plans on hold. Chinese social media and lifestyle platform Xiaohongshu, e-commerce platform Meicai, medical data solutions provider LinkDoc Technology and fitness app Keep are among the companies that have shelved their IPO plans recently.
“Even if it isn’t a company caught squarely by the regulations, i.e. not over 1 million users or is in an industry like a traditional consumer business, I still think that will give you some pause,” said Kuo, who is co-founding partner of private equity firm Canyon Bridge Capital Partners and is based in Hong Kong.
One issue for SPAC sponsors and target companies will be if they need so-called private investment in public equity (PIPE) financing from international investors to complete deals, Kuo said. (Typically, listed SPACs borrow additional money beyond the capital raised in their IPOs to complete acquisitions).
“People are really going to be antsy about participating in a PIPE where you’re taking months of market risk where you can’t trade it and you’re committed to a deal,” Kuo said. “That will be a practical impediment.”
The reality for many SPAC sponsors is they have 18 months to two years to complete a transaction and need to derisk that deal “no matter how good the target looks”, according to Steve Kaplan, head of capital markets at investment bank Ladenburg Thalmann & Company.
“If you’re a sponsor team, you have to be very, very careful going down a path where you can be shutdown outside your control,” Kaplan said.
A higher degree of risk may steer some sponsors away from deals that could fall under the new Chinese listing rules, but there remains pressure for SPACs who have gone public to consummate deals in the next few years, according to Steven Canner, co-chair of law firm Baker & McKenzie’s transactional group in New York.
“There are a lot of SPACs in competition to find appropriate targets,” Canner said. “There will be a marketplace for robust companies, regardless of where they’re located.”