Sunday, 21 July 2013

SPACs, a bubble in the making?

Article in The Star by Risen Jayaseelan:

"Sizzling SPACs, Promoters and investors race to be part of this investment vehicle" 

Some excerpts:

"SPACs (special-purpose acquisition companies) are red hot at the moment.

The massive demand for shares of the soon-to-be-listed Sona Petroleum Bhd is testament to that. By some estimates, a whopping RM3bil of liquidity was chasing to get a slice of the RM550mil worth of shares being offered in that IPO. And banking sources claim that demand was more than that RM3bil figure.

Investors are no doubt drawn to the 327% total returns that an IPO investor in Hibiscus Petroleum Bhd (the first listed SPAC) is sitting on.

SPACS will also go down in history for the mind boggling ‘value creation’ it could potentially give senior management types in Malaysia. Just using the example of the promoters of Hibiscus and CLIQ and considering their initial cost of 1 sen per share, they are sitting on returns of 245 times and 124 times respectively. In other words, every one sen they put in is now worth RM2.45 (for Hibiscus’ promoters) and RM1.24 (for CLIQ’s promoters).

No wonder then that there is no dearth of parties wanting to float their SPACS. Market talk has it that Datuk Tan Ang Meng, the former Fraser & Neave Holdings Bhd CEO, is mulling a SPAC focused on the food and beverage sector, using his experience and contacts in the industry. Then there’s Shahul Hamid Mohd Ismail, a director in the Daya Group of companies, who is in the midst of planning an oil and gas SPAC.

In the past, there were other SPACs that were toyed about but have yet to come to fruition. One of them include property player Datuk Terry Tham, the MD of Eastern & Oriental Bhd, to put together a SPAC to invest in overseas properties in locations such as London.

There had also been plans by some parties to set up a plantation-focused SPAC."

To me, this all sounds rather scary. I have written about SPACs before, in a not very positive way. I have written that they appear to be very good (actually: too good) for their promoters/managers: hardly any risk (they even receive very decent salary in the millions), but lots of possible return. When I read that investors have a return of 327% (not bad, I agree) and promoters of 24,500% (75 times as high as the normal investors) then one can indeed wonder if things are fair.

Also, the promoters of the first SPAC received warrants with an exercise price of RM 0.10 while the normal investors had to do with warrants with an exercise price of RM 0.50, a huge difference and not exactly fair. It seems that the Securities Commission has indeed looked into this matter.

Regarding the above high returns: apparently there are some investors at this moment prepared to pay these high prices for previously listed SPACs. However, what the fundamental value is at this very moment, nobody knows, it is much too early to tell. SPACs will have operational losses over the first few years since it takes a lot of time to get the actual exploration going. Cost overruns and delays are also very common in these kind of industries (oil & gas and mining). If the financial results in the long term will support the current share prices through good profits (and possibly dividends), that is very hard to tell. As one person commented in my blog, SPACs look like junior mining companies, whose results are very volatile and risky.

If I read about the hot market for SPACs, then it reminds me of the (in)famous South Sea Bubble:

I highly recommend the reader "Memoirs of Extraordinary Popular Delusions and the Madness of Crowds" by Charles MacKay:

"....In the mean time, innumerable joint-stock companies started up everywhere. They soon received the name of Bubbles, the most appropriate that imagination could devise. The populace are often most happy in the nicknames they employ. None could be more apt than that of Bubbles. Some of them lasted for a week, or a fortnight, and were no more heard of, while others could not even live out that short span of existence. Every evening produced new schemes, and every morning new projects."

"....Some of these schemes were plausible enough, and, had they been undertaken at a time when the public mind was unexcited, might have been pursued with advantage to all concerned. But they were established merely with the view of raising the shares in the market."

"But the most absurd and preposterous of all, and which shewed, more completely than any other, the utter madness of the people, was one started by an unknown adventurer, entitled "A company for carrying on an undertaking of great advantage, but nobody to know what it is." Were not the fact stated by scores of credible witnesses, it would be impossible to believe that any person could have been duped by such a project."

The similarity with SPACs is striking, to say the least.

It is true that the assets to be acquired by SPACs have to be approved, but then again, how often are proposals from majority shareholders voted down by minority shareholders? It hardly ever happens in Malaysia.

The iTulip website on the same subject:

"The prospectus promised unheard-of rewards.  At nine o'clock in the morning, when the subscription books opened, crowds of people from all walks of life practically beat down the door in an effort to subscribe.  Within five hours a thousand investors handed over their money for shares in the company.  Not being greedy himself, the promoter promptly closed up shop and set off for the Continent.  He was never heard from again."

I am confident that the Securities Commission is doing a decent job, and that the above (promoters running away with the IPO money) will not happen in Malaysia, at least that is what I hope.

But I still don't like SPACs, they simply go against my (investment) grain. The initial risk of companies should lay with their founders and the angel investors. In a later stage other investors (like Venture Capital funds) are asked to do follow up investing. When the company goes public (this could easily be 10-20 years down the road) it should have a proven business model, possibly having established a brand name, a clear revenue model and customers for their products/services. People who invest during the IPO can study the track record of the company versus their direct competitors.

In the case of SPACs, there is nothing, except some promoters/managers with a track record in the industry, they might not even have worked together before as a team.

That is for me not a sufficient enough base for investing in a public listed company, the risk at that moment in time is simply much too high.

I hope I am wrong, but to me it looks very much like the start of a bubble (partly driven by yield hungry investors, given the low interest environment), and bubbles always burst, even though it can take years for that to happen. But when the bubble bursts, it is never a happy end, except possibly for some insiders who sold on time. Buyer beware!


  1. It always easy to sell the spac based on only need to show you are profitable years down the road. Therefore, it wouldn't be surprise to see people getting their fingers burnt and the promoters laughing all the way to the bank.

  2. I fully agree, as long as everything is in the future, one can promise anything.