In recent years, SPAC IPOs have shown a series of structural trends. At a high level, below are the key issues and trends we are following:
I. SPACs Overview:
Moved to more specific, niche sectors, like energy, healthcare, and technology.
SPAC sponsor teams include repeat serial issuers (Jeff Quin, Jeff Sagansksy, Nathan Leight, Lorne Weil and Dan Hennessy) and high-quality first-time issuers (Wilbur Ross, TPG, Silver Run, Gores).
Most SPACs have listed on NASDAQ; some recently on NYSE.
Regardless of deal size, current SPACs use a $10.00 unit.
Including the interest, 100%+ capital raised for the SPAC IPOs is held in trust funds until SAPCs identify the optimal merging opportunities.
Usually have 21-24 months to find an acquisition, including extensions.
II. SPACs Procedure:
In the majority of traditional IPO transactions, companies incur an underwriter fee at about 6% of gross proceeds. On a SPAC, issuers only have to pay 2%-3% up-front fees, with remainder payable upon successful business combination which lowers the risk of SPAC IPOs.
Depending upon the size of the SPAC, sponsor’s “At-Risk” capital is approximately 5%, and its share is free of dilution.
Warrant strike out-of-the-money has increased greatly. Warrant : Stock ratio grows from 1 : 1 to 1.3 : 1 (or 1.5 : 1). Therefore, this increase significantly reduced overhang and improved the utilization rate of capital.
The strike price of warrants is approximately 115% - 120% of unit offering price. There is a concurrent increase to warrant call price of approximately $5 - $6 above the strike price, and the warrant package is at $.50 - $1.00 per warrant.
The vast majority of SPACs have warrant strikes out-of-the-money for $11.50 (so it’s $5.75 for ½ warrant).
III. Shareholder's Policy:
In order to lessen the effect of “no voters,” modifications are made to shareholder vote features in SPACs:
the redemption threshold has been increased
shareholders can vote “Yes” and can still opt to get their money back
Under certain circumstances, shareholders may exercise tender off options, which means they have the opportunity to redeem their shares of common stock for cash upon consummation of business combination.
How SPACs Benefit Chinese Companies
For the healthcare industry, the characteristics of SPACs - low cost and quick process - make this listing method especially advantageous.
Since healthcare companies are often industry leaders with high growth and large market share, it is easier for them to meet the merger requirements such as in profit, taxation, and intellectual property etc.
The emergence of the concept “Big Healthcare” has brought together several different industry verticals including medical care, biotech, and medicine into the marker. The expanded scope covers a broader market and captures more public attention.
According to the research by Chinese Academy of Science and Technology for Development, by 2020, China's biomedical industry will reach a scale at about 8 trillion CNY. The potential of the entire healthcare industry will be about 10 trillion CNY, which accounts for more than 10% of the total GDP.
In 2011, ratio of the per capita consumption in the healthcare industry in the United States was $100, while the per capita consumption in the same year in China was less than $10. Nevertheless, China has a larger elderly population and a vast social security system. Therefore, the demand in China for medical services, dietary supplements, and various types of medicines is tremendous.
The huge underlying potential of the “Big Healthcare” sector will bring an inevitable issue: a crowd of emerging companies chasing after a limited amount of available capital on the market. China's sci-tech innovation board starts trading on July 22nd – but only 25 companies were included in the first launch, which is still seemingly a “dead end” for so many other Chinese companies looking for support from its domestic secondary market.
It is noteworthy that, on July 30th Xinfeng Tianyu, a SPAC company established by Xinfeng Tianyu Group, announced that it has reached a final acquisition transaction agreement with a major private medical institution in mainland China - the Yijia Medical Group. Xinfeng Tianyu is the first non-US SPAC company listed in NYSE, and this successful transaction has proved to both Chinese companies and investors that seeking overseas capital to support company growth is achievable. SPAC’s have demonstrated that they can secure as a mature channel for finding overseas funds, suitable for Chinese companies, but also an approach where China’s foreign exchange reserve could receive a considerable boost.
SPAC IPO’s are a great way for Chinese companies that are planning to be listed overseas, especially on NASDAQ or NYSE, to access the capital markets. In recent years, CNY is gradually getting extremely difficult to be transferred abroad, and SPAC’s wave become an approach that complies with both Chinese laws and national policies, and at the same time enables the Chinese government to earn foreign currency revenue (government gets US$50 million to US$500 million profits from each SPAC IPO) and allows shareholders to obtain NASDAQ stocks.
Profits in this way, China earns foreign currencies, and investors both in the operating company and in the United States (that invested in SPAC) obtain NASDAQ shares. VIE structure is used for Chinese domestic investors and foreign exchange. If the fund size is large, companies may need to consider multiple SPACs.
As of now, we have briefly introduced various features and benefits of SPACs. You can refer to the previous three episodes of our SPAC column to find out more regarding this topic. Bridge Point Capital leverages our deep experience in finance & “Big Healthcare” sector and our deep understanding of the SPAC practical process for the benefit of its clients. We strive to build a bridge between the Chinese companies and overseas investors. You can also follow our WeChat official account: 桥健资本, or send emails to firstname.lastname@example.org to contact us.