Hony Capital Switches SPAC IPO Focus from U.S. to Hong Kong

Key Takeaways:

• Everest Acquisition Corporation, a SPAC co-funded by Hony Capital and ABCI Capital, applied to list in Hong Kong with the aim of acquiring companies in the healthcare, consumer goods and green sectors
• In April this year Hony Capital scrapped a bid to list another SPAC, Hony Capital Acquisition, in the U.S. and has turned instead to the Hong Kong market, most likely to reduce exposure to tensions between China and the U.S.

By Tina Yip

Hong Kong’s stock market has had a dismal year, with sliding prices and a slump in IPO activity, but a drive to attract SPAC listings has drummed up some interest.

The Hong Kong Stock Exchange (0388.HK) has been the preferred fund-raising route for several special purpose acquisition companies since it gave the green light to such listings earlier this year to compete with regional rival Singapore.

One of the SPACS seeking a Hong Kong IPO is Everest Acquisition Corporation, launched in March by private equity fund Hony Capital under Legend Holdings Corp. (3396.HK) and by ABCI Capital, a subsidiary of state-owned Agricultural Bank of China (ABC) (1288.HK). The SPAC filed to list at the exchange last Monday with ABC International and Citibank as co-sponsors. 

The market conditions are challenging for IPO candidates. In the last two months the Hang Seng index fell to its lowest level since 2011. As of Sept. 26, only 61 companies had gone public this year at the Hong Kong Stock Exchange, and 35 of them have fallen below their IPO prices, to the dismay of fans of new shares.

Still, there has been a handful of SPAC listings. Everest Acquisitionis looking to join four other SPACs that have succeeded in listing in Hong Kong since the exchange opened its doors to the shell companies, which seek to use M&A to take companies public quickly, sidestepping the traditional IPO process. But the market performance of the earlier SPACs may not bode well.

The SPAC stocks have languished without money from retail investors, as market access is limited to professionals. Only Interra Acquisition Corporation (7801.HK), which listed on Sept. 16, has managed so far to stay at its IPO price of HK$10.

That SPAC was launched by Primavera Capital and ABCI Asset Management with the aim of acquiring fast-growing companies in sectors as diverse as innovative technology, consumer goods and new retail, high-end manufacturing, healthcare and climate-related commerce.

Everest Acquisition would be ABC’s second SPAC to be deployed in the Hong Kong stock market.

Everest Acquisition has also set its sights on projects in tech-enabled and high-growth sectors such as healthcare, consumer goods and green development, putting it in the same hunting ground as Interra Acquisition. In its prospectus, the company noted the potential acquisitions overlap with Interra and vowed to compete fairly for good M&A opportunities.

Hony Capital, founded in 2003, is a prominent private equity (PE) pioneer in China with around $10 billion under management by the end of last year. Its investments span a range of industries such as healthcare, consumer goods, green development, digital technology, life science, and cultural or scientific innovation. Its chairman John Zhao is also the chairman of Everest Acquisition, suggesting the SPAC may absorb companies backed by Hony Capital to help them go public quickly, clearing the way for early investors to cash out.

According to Everest Acquisition’s prospectus, Hony Capital has made 18 investments in the healthcare sector in the past 18 years, worth a total of $1.2 billion. The beneficiaries include public companies such as CSPC Pharmaceutical Group (1093.HK), Simcere Pharmaceutical (2096.HK), Consun Pharmaceutical (1681.HK) and I-Mab Biopharma IMAB as well as RootPath, EpimAb Biotherapeutics and Biosensors that have not gone public.

The firm has also invested in more than 20 consumer goods companies in the past 18 years to the tune of more than $1.4 billion. Famous names on the list include Bytdance, Jin Jiang Int’l Hotels (600754.SH) and Linmon Media (9857.HK). Its green development portfolio includes the likes of ENN Natural Gas (600803.SH), Linyang Energy (601222.SH) and Infore Environment Technology (000967.SZ).

Seeking shelter back in Hong Kong

While the U.S. was in a SPAC frenzy last March, Hony Capital set up Hony Capital Acquisition and filed an initial registration with the U.S. Securities and Exchange Commission for the SPAC to go public in the U.S. targeting tech-enabled firms in China’s healthcare and consumer goods industry. The SPAC was also led by Zhao and had plans to raise $300 million, but in its updated prospectus in June the amount was cut by 33% to $200 million.

The IPO application for Hony Capital Acquisition was withdrawn in April after more than a year of listing efforts came up empty. Less than five months later, it has partnered with ABCI Capital to target the Hong Kong SPAC market.

The company’s pivot comes as the U.S. SPAC boom is fizzling out and tensions between the U.S. and China are on the rise.

As of Sept. 26, only 76 SPACs have gone public in New York this year raising $12.6 billion, less than 8% of the amount raised the previous year.

There is limited upside for Chinese companies in seeking a U.S. IPO amid intensifying competition between the two economic powers, and in fact a U.S. share flotation has become fraught with risks.

Although the countries’ securities regulators have reached a deal in an auditing dispute, foreign companies that fail to comply with U.S. accounting regulations for three straight years would still be forced out of the stock market. As a result, Chinese stocks listed in the U.S. that were the toast of the market two years ago are now being deserted by wary investors.

Since the U.S. passed its Holding Foreign Companies Accountable Act two years ago, many companies have returned to Hong Kong as an IPO launchpad, some filing for dual listings in both Hong Kong and New York, keen to reduce the risk of having to retreat from the U.S. market.

The same line of thinking might also lie behind Hony Capital’s choice of Hong Kong as a listing venue. But there is a catch. Even if the SPAC can swiftly pass listing hearings, it may struggle to generate enough interest among dispirited professional investors in a sluggish Hong Kong market. Thus, what Hony Capital and ABCI Capital probably need most right now is luck and patience.