Hong Kong SPAC Market Wilts as Global Fever Ebbs

Key Takeaways:

• Only three Hong Kong SPACs have listed since the city launched a local program early this year, and all now trade below their listing prices
• U.S. SPACs have raised $12.5 billion so far this year, less than 10% of what they raised in 2021, as the global SPAC market cools

By Ken Lo

Blame it on the market. Or perhaps special purpose acquisition companies (SPACs) were just a tad ahead of their time for Hong Kong investors.

Whatever the case, SPACs, the cash-filled publicly traded shells used as vessels to take real companies public, have sputtered since their introduction in Hong Kong at the start of this year. In fact, the entire IPO market, which is closely tied to SPACs, has struggled this year amid a slowing global economy. Only 27 companies went public in Hong Kong in the first half of the year, raising a collective HK$18.1 billion ($2.3 billion), down over 90% from a year earlier and the lowest amount in a decade. Many might argue that sluggish performance has also sapped local interest in SPACs, which were just allowed in the market at the start of this year.

The Hong Kong Stock Exchange introduced its new SPAC program after the backdoor listing mechanism soared to global popularity in recent years. It made the move to maintain its spot as a regional fundraising hub, and also to avoid being outmaneuvered by regional rival Singapore. The program allows SPACs to go public and later conduct “reverse mergers” whose ultimate purpose is to take real private companies public.

Following the launch of Hong Kong’s SPAC program to much fanfare on Jan. 1, more than 10 sponsors reportedly filed for SPAC IPOs in the first quarter alone. But then global markets began to swoon, and only three SPACs have managed to actually list. Hong Kong’s draconian requirements for SPAC listings are believed to be a major factor preventing the asset type from becoming more mainstream.

Unlike SPAC programs in the U.S. and Singapore, Hong Kong SPACs are only open to professional investors for subscription before a target company is acquired. And at least 20 professional investors must put in at least HK$1 million each, essentially shutting out smaller institutions and all retail investors. In addition, companies are required to raise the equivalent of roughly $130 million through each offering, setting a relatively high bar in the current depressed market.

Fourth SPAC coming

The higher requirements for Hong Kong SPACs relative to the U.S. and Singapore have cooled investor enthusiasm. Share prices of all three listed SPACs in the city currently languish below their listing price of HK$10, with low trading volume for all.

By investing in a SPAC that contains nothing but cash, a professional investor is essentially betting on the SPAC’s management team, hoping that team can complete the acquisition of a promising real-world company within the prescribed three-year limit.

Sponsors of Hong Kong’s three listed SPACs are all veteran investors with deep ties in the financial world. Aquila Acquisition (7836.HK), which went public on March 18, is backed by CMB International Asset Management Ltd., an investment firm with state-owned background. Vision Deal HK Acquisition (7827.HK), which listed in June, is led by former Alibaba BABA CEO David Wei. And HK Acquisition Corp. (7841.HK) was launched in August by big names like Norman Chan, the former chief executive of the Hong Kong Monetary Authority, and Katherine Tsang, former chairwoman of Standard Chartered Bank (China) Ltd.

Interra Acquisition (7801.HK), which will join that small group with its scheduled trading debut on Friday, was established by Chinese venture capital fund Primavera Capital Group, founded by a former top Goldman Sachs official.

It’s worth noting that Aquila Acquisition – the first SPAC to go public – recently revealed it lost HK$93.98 million in the first half of this year, mostly due to IPO-related expenses and underwriting fees. The fact that the company has already lost nearly 10% of the HK$1 billion it raised through its listing is making some investors think twice about subscribing to any future SPACs.

Stumbling U.S. market

Hong Kong certainly isn’t alone with a languishing SPAC market. The U.S. SPAC market, which was at the forefront of the recent wave, was in full swing for two years before hitting the skids in 2022. Data shows that 248 companies made U.S. SPAC listings in 2020, and the figure more than doubled to 613 last year, raising a combined $162.5 billion over that time. But the market has entered a deep freeze this year, with only 75 SPACs going public, raising just $12.5 billion through Sept. 14. That’s less than 10% of the amount raised last year.

Many factors underlie the slowdown, including growing difficulty for SPACs to identify viable target companies because of tightened regulation from the Securities and Exchange Commission (SEC). The Fed’s aggressive interest rate hikes haven’t helped either, making margin trading more expensive for investors.

The U.S. SPAC market’s decline has also affected Hong Kong-sponsored SPACs listed in New York. For example, genetic testing startup Prenetics PRE merged with a SPAC owned by Hong Kong property magnate Adrian Cheng, CEO of New World Development (0017.HK), in May, becoming the first Hong Kong unicorn listed using a U.S.-traded SPAC. But it hasn’t done well, and its Wednesday close of $3.85 is less than half the SPAC’s listing price of $10.

The story is similar in Singapore, which launched its SPAC program a few months before Hong Kong’s. Only three SPACs are listed in Singapore, all of them now trading below the offer prices with sluggish volume.

The lack of retail investors in the Hong Kong SPAC market has played a big role in limiting the appeal of the asset type, said Kenny Wen, head of investment strategy at KGI Asia. SPACs have never attracted much attention on the Hong Kong Stock Exchange since their launch, which explains the current lukewarm sentiment toward the small group.

Wen said that Hong Kong set up the SPAC mechanism mostly to emulate and avoid falling behind Singapore, and also to provide an additional financing platform for fast-growing unicorn companies. But the waning of SPAC fever in the U.S., combined with the broader downturn in the Hong Kong IPO market, have made it difficult for Hong Kong SPACs to take off.