Banking & Finance

Blank cheque billions

From Li Ning to Faraday Future, Chinese tycoons embrace SPACs


Li Ning: from sneakers to SPACs

What do the following four-letter words have in common: spiv and scam, spar and spat? The answer is a fifth term, called a SPAC (special purpose acquisition vehicle), an increasingly trendy way to invest in the public equity market.

Columnists have used the first two words to describe a SPAC’s attributes and the latter two to predict how things might eventually play out with securities regulators. The Chinese media is also now paying attention, as Asian stock exchanges, including Hong Kong and Singapore, debate whether to start allowing SPACs as well.

BiaNews recently ran a lengthy article educating Chinese investors about SPACs: shell companies that raise funds on a stock exchange, then use the IPO proceeds to fund an acquisition, typically within an 18-24 month timeframe. Funds are returned to investors if they don’t find a target. If they do, the acquisition target takes over the shell, effectively executing a reverse takeover.

Global SPAC IPO volumes have ballooned from just under $4 billion in 2015 to $83.3 billion in 2020 according to Dealogic data. Asian-focused SPACs accounted for $2.46 billion of last year’s figure. This year, that figure represents $2.64 billion of the $79.4 billion raised globally in the first two-and-a-half months.

Such huge sums are setting off alarm bells. Berkshire Hathaway’s 97 year-old deputy chairman Charlie Munger, for one, has described the SPAC idea as “crazy”.

“It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment,” the SEC’s Office of Investor Education and Advocacy also warned in an investor alert this month.

However, numerous Asian tycoons, private equity companies and even the odd sporting superstar are piling in. Their ranks include the retired Chinese gymnast Li Ning, plus Hong Kong’s Li Ka-shing and his son Richard Li (he has launched two SPACs in association with PayPal founder Peter Thiel).

Li Ning, who founded the eponymous Hong Kong-listed sportswear group, has launched a SPAC called Trinity Acquisition via LionRock Capital, a Hong Kong-based private equity firm where he serves as non-executive chairman.

Only founded this year, Trinity filed earlier this month with the SEC to raise up to $250 million ahead of a planned New York listing. The “blank cheque company” will focus on consumer lifestyle companies with “China potential” and ones which can benefit from its management’s expertise.

Investors might wonder this: if there are such promising acquisition targets, why is his listed firm, Li Ning, not being used as the primary investment vehicle.

Nonetheless, alternative asset managers and private equity groups behind these Chinese-backed SPACs reportedly include Citic Capital, Hony Capital and Primavera Capital.

SPACs have been around since the 1990s and started off as small-scale vehicles for experienced dealmakers looking to raise equity funding for prospective M&A. Their typical investors were hedge funds with whom they’d partnered before and who trusted their judgement.

However, exponential growth has put SPACs on the radar of even the smallest mom-and-pop investor. That’s problematic for regulators.

Chinese regulators, in particular, have worked hard to suppress backdoor listings that allow companies to slip in under the radar, which is just what a SPAC offers potential M&A targets. The last thing Beijing needs is yet another scandal relating to companies seeking to make a quick or fraudulent buck from gullible investors.

The most famous Asian SPAC to date – New Frontier – was set up in 2018 by Hong Kong’s former financial secretary Antony Leung. It then purchased a Chinese healthcare company in 2019, but its management is now taking it private after the share price failed to perform. New Frontier, Reuters reported this month, is tapping the SPAC market for the second time with a $300 million IPO.

Another high-profile SPAC candidate is Sino-US electric vehicle (EV) start-up Faraday Future. It is going to use the vehicle Property Solutions Acquisition Corp to achieve a Nasdaq listing. The company is probably glad that it will avoid IPO-related headlines examining the back-story that culminated in the bankruptcy of its founder, Jia Yueting.

His creditors are likely to be happy too, as Jia’s Faraday shares are now held in trust to pay them back. They’ll benefit if public market equity investors pile into the share price frenzy that’s pushed up China EV start-ups like NIO and XPENG to very punchy valuations.

Jia is now officially product head at Faraday, which has secured some high-profile backers for a $775 million fundraising accompanying the SPAC acquisition. They include Geely, which will build the long mooted FF91 supercar (as we reported in WiC530); plus Zhuhai-based Gree, which is keen to get into the EV field; and the local government in Zhuhai too. Faraday will reportedly set up a factory in Zhuhai and it seems set to become its springboard back into China.

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