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Monday 18 January 2010
Spacs - just a big bet on a management name?
The Singapore Exchange’s latest proposals to let special purpose acquisition companies (Spacs) list here is its second attempt to allow punters to bet on investments backed by a name - and little else.
Observers point to challenging issues over governance, alignment of interests
By CHEW XIANG 08 January 2009
(SINGAPORE) The Singapore Exchange’s latest proposals to let special purpose acquisition companies (Spacs) list here is its second attempt to allow punters to bet on investments backed by a name - and little else.
In July 2008, SGX issued a consultation paper on a set of listing rules for blind pool funds. Such funds raise money from the public for specified investments, for instance, in the energy, life sciences, or technology sectors. Such funds would have no track record or assets, so their only draw would be the reputation of their investment management team.
The proposals didn’t take off. Eighteen months later, blind pool funds have yet to be approved for listing here. ‘The foreign banks were pushing it alot then but going ahead when the market was so poor would have gotten a lot of heat,’ an industry source says.
Up step the Spacs. Unlike blind pool funds which essentially offer a portfolio approach to investing, Spacs instead focuses on a single company, or groups of related ones (business combinations) bought and then managed by dealmakers. These targets are essentially firms that - in theory at least - could have been listed on their own, so buying into a Spac is essentially ‘buying an option on a future listing’, says one industry insider.
But like blind pool funds, Spacs have no track record and no assets and can lure investors only with the star name dealmakers that back them. And that creates a whole set of problems.
Such vehicles have flourished in the United States, backed by luminaries such as billionaire investor Ron Perelman and Apple co-founder Steve Wozniak.
But many Spacs there have been forced to liquidate, unable to complete acquisitions within the specified time frames (generally 18-24 months in the US, and three years under SGX’s proposals). Critics say that big payouts to ‘star’ management teams and the time limit to get a deal done means poorer companies get bought and investor returns go down. Some early iterations were nothing more than ‘pump and dump’ scams.
In Singapore, the risks of the new structure could overshadow their potential returns, say industry observers. ‘Spacs will introduce challenging governance issues at this juncture,’ says Robson Lee, a partner at law firm Shook Lin & Bok.
SGX’s proposals to protect investors stipulate that 95 per cent of the money raised would be held in escrow, to be used only for acquiring a business. And if shareholders don’t like the deal presented to them, they can choose to redeem their shares for a pro rata share of the cash held in escrow; if 40 per cent of shareholders choose to do this, then the acquisition is off.
But one of the biggest issues is that of alignment, notes Marcus Chow, director at Drew & Napier. SGX’s proposals would also give founding shareholders - the promoters - a free stake of 10 per cent, as well as oblige them to subscribe to another 2 per cent at the IPO price. ‘Is that sufficient to align interests or founding shareholders and management with that of independent shareholders?’ he says.
Agency issues will have to be resolved in each practical case like how much the managers pay themselves, and what are the benchmarks of assessing performance.
Then there are the practical issues. How are business combinations defined? Given that SGX suggests that the assets acquired should be valued at 80 per cent of the Spac’s net asset value, must acquisitions be completed in one shot, or can they be drawn out over time?
And what about cash companies - firms that have sold their operating assets but cling on stubbornly to their listed status. The exchange has been pushing such companies to either find a new business or de-list but the Spac could be a way back to life for them, says Mr. Lee. Why then is SGX encouraging glorified cash companies?
‘Fundamentally, one should be asking why the founding shareholders are so altruistic in sharing good business combinations with the independent shareholders,’ says a corporate lawyer.
It seems a perverse, if logical, extension of a disclosure-based approach to regulation, notes one observer. ‘At first, you say, disclose everything and let the market decide. Now all you need is disclose the management name - how is the market going to decide?’
2 comments:
Spacs - just a big bet on a management name?
Observers point to challenging issues over governance, alignment of interests
By CHEW XIANG
08 January 2009
(SINGAPORE) The Singapore Exchange’s latest proposals to let special purpose acquisition companies (Spacs) list here is its second attempt to allow punters to bet on investments backed by a name - and little else.
In July 2008, SGX issued a consultation paper on a set of listing rules for blind pool funds. Such funds raise money from the public for specified investments, for instance, in the energy, life sciences, or technology sectors. Such funds would have no track record or assets, so their only draw would be the reputation of their investment management team.
The proposals didn’t take off. Eighteen months later, blind pool funds have yet to be approved for listing here. ‘The foreign banks were pushing it alot then but going ahead when the market was so poor would have gotten a lot of heat,’ an industry source says.
Up step the Spacs. Unlike blind pool funds which essentially offer a portfolio approach to investing, Spacs instead focuses on a single company, or groups of related ones (business combinations) bought and then managed by dealmakers. These targets are essentially firms that - in theory at least - could have been listed on their own, so buying into a Spac is essentially ‘buying an option on a future listing’, says one industry insider.
But like blind pool funds, Spacs have no track record and no assets and can lure investors only with the star name dealmakers that back them. And that creates a whole set of problems.
Such vehicles have flourished in the United States, backed by luminaries such as billionaire investor Ron Perelman and Apple co-founder Steve Wozniak.
But many Spacs there have been forced to liquidate, unable to complete acquisitions within the specified time frames (generally 18-24 months in the US, and three years under SGX’s proposals). Critics say that big payouts to ‘star’ management teams and the time limit to get a deal done means poorer companies get bought and investor returns go down. Some early iterations were nothing more than ‘pump and dump’ scams.
In Singapore, the risks of the new structure could overshadow their potential returns, say industry observers. ‘Spacs will introduce challenging governance issues at this juncture,’ says Robson Lee, a partner at law firm Shook Lin & Bok.
SGX’s proposals to protect investors stipulate that 95 per cent of the money raised would be held in escrow, to be used only for acquiring a business. And if shareholders don’t like the deal presented to them, they can choose to redeem their shares for a pro rata share of the cash held in escrow; if 40 per cent of shareholders choose to do this, then the acquisition is off.
But one of the biggest issues is that of alignment, notes Marcus Chow, director at Drew & Napier. SGX’s proposals would also give founding shareholders - the promoters - a free stake of 10 per cent, as well as oblige them to subscribe to another 2 per cent at the IPO price. ‘Is that sufficient to align interests or founding shareholders and management with that of independent shareholders?’ he says.
Agency issues will have to be resolved in each practical case like how much the managers pay themselves, and what are the benchmarks of assessing performance.
Then there are the practical issues. How are business combinations defined? Given that SGX suggests that the assets acquired should be valued at 80 per cent of the Spac’s net asset value, must acquisitions be completed in one shot, or can they be drawn out over time?
And what about cash companies - firms that have sold their operating assets but cling on stubbornly to their listed status. The exchange has been pushing such companies to either find a new business or de-list but the Spac could be a way back to life for them, says Mr. Lee. Why then is SGX encouraging glorified cash companies?
‘Fundamentally, one should be asking why the founding shareholders are so altruistic in sharing good business combinations with the independent shareholders,’ says a corporate lawyer.
It seems a perverse, if logical, extension of a disclosure-based approach to regulation, notes one observer. ‘At first, you say, disclose everything and let the market decide. Now all you need is disclose the management name - how is the market going to decide?’
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