Tuesday, 19 March 2013

SPAC's: Boon or Bane?

Initial Public Offers (IPO's) for Special Purpose Acquisition Companies (SPAC) seem to be the flavour of the month on Bursa Malaysia. The following companies are either listed, or will be listed soon:
  • Hibiscus
  • CLIQ Energy
  • TerraGali Resources
  • Australaysia Resources & Minerals
  • Sona Petroleum
The share price of Hibiscus has performed well since its listing, probably explaining the recent surge in SPAC's. Hibiscus booked a loss of 7m over 2012. It made some acquisitions, apparently shareholders believe that these will pay off in the future. At the moment, it is much too early to say anything about this, these things take time.

Some general remarks about SPACs:
  • The companies have no track record, assets, turnover or brand names
  • The managers receive large chunks of shares (about 20% of the issued capital) for a very cheap price, almost for nothing
  • They still receive millions a year in management fees
  • Listing fees are high, often around RM 20 million (depending how much money is raised), to be paid from money raised
  • Shareholders often receive warrants, that sounds interesting, but is neutral when all parties receive warrants; on top of that, sometimes the insiders have warrants with a lower exercise price
  • Shares offered often are at about 25% premium to NAV, meaning the net asset value has to rise by 33% just to equal the IPO price
  • Often difficult financial structures are used, for instance Hibiscus issued RCPS and CRPS, "alphabet soup" instruments designed by financial engineers that will be much too difficult to analyse for the huge majority of the retail investors
  • I also noticed already a Private Placement for Hibiscus, another concern
The IPO documents are still very thick, around 250 pages, and that for companies with no history.

In my opinion:
  • SPAC's are very good for the managers, they have almost nothing to lose and still earn good wages
  • The verb is "you can't have your cake and eat it", but SPAC's managers prove the verb is wrong
  • Minority shareholders pay for the dilution by and fees for the managers, and carry almost all of the risk
Much more preferable (in my opinion) for investors who are interested in these industry (energy and other natural resources) to simply invest:
  • In a basket of listed global mining or energy blue chips, companies with proven track records; some examples are BHP, Barrick Gold, Royal Dutch Shell, Total, Statoil, etc.
  • Or (if an investor has no time to analyse them) in well managed funds who invest in these areas (Blackrock for instance has some decent energy, gold and mining funds)
  • Or (if people deem the management fees of these funds as too expensive) in energy or mining ETF's with very low fees
SPAC's are instruments designed by financial engineers, they don't add any economic value, in my opinion.

While engineering in general has brought us so much good (cheaper, better, stronger solutions), financial engineering hasn't, in the contrary. Unfortunately, financial engineering is getting more and more popular on Bursa Malaysia.


  1. Dear Mr Wind,

    I would like to correct you on the 'Managers have nothing to lose and still earn good wages'.

    If you look at the SPAC IPO in Malaysia, 90% of the funds by investors are going to put into a trustee account, and the management cannot use it unless for the Qualifying Acquisition purpose. As the time frame is 3 years, interest adding up to the 90% funds would be almost equal to the initial 100%. Let's say the company could not finish the QA process, investors can still get back near to 100% initial invested amount.

    In that case, i see the investment security is very good as it is protecting the investors.

    Thank you.

    1. Miss NUR Casablanca31 May 2013 at 11:22

      Awesome. Gud brief Sir!.

  2. I agree, the trustee way of setting things up sounds pretty good. But that is not my issue, all SPAC's will within 3 years have invested their IPO proceeds, I am very sure about that.

    What I mean is they get a huge chunk of the company for free and still earn about 4M wages per year. And that for a company with no trackrecord (although the managers might have a trackrecord before individually).

    Anyhow, just my opinion.

  3. Alternatively investors can invest directly into a number of junior resources companies usually found in ASX or Toronto. The risk profile and business model of such companies are very similar to SPAC with 2 major distinctions - 1) the underlying assets are known; 2) investors do not need to cede a big premium of 15%-20% of the shareholdings to management.

    For investment into resources company, the devil is in the details when it comes to assessing a company's outlook. In the case of SPAC, there is nothing to assess but the management's credibility. Personally, i wont know how to assess the management of any of these companies. This is definitely a case of buyers beware!

  4. Thanks Shadow, interesting comment with which I agree.

  5. Can anyone assist who shall we approach as we are interested in the SPAC application for our recent Renewable Energy Program.

  6. They should have a website with a email address or phone number. I don't give you much chance, I don't think they are looking for renewable, but please try anyhow, good luck!