Procter & Gamble – Asia Hedge Funds Join SPAC Craze in Race to Back Next Grab
Asia-based hedge fund managers including Sylebra Capital Ltd. and Aspex Management are joining the SPAC boom, seeking large stakes in companies that could emerge as the next Grab Holdings Inc.
The two firms, along with Snow Lake Capital and Dymon Asia Capital, have pumped hundreds of millions of dollars in the past few months into private placements that help finance SPAC deals. The funds are eyeing big positions in what they’re betting will be future giants in industries ranging from plastic recycling to renewable energy storage.
The funds are committing more money even as U.S. regulators clamp down on special purpose acquisition companies that have raised $100 billion this year, topping last year’s record. The craze has prompted the U.S. Securities and Exchange Commission to issue new guidance on accounting for SPAC warrants, and warned that the vehicles aren’t a way around securities rules.
Even with the heightened scrutiny and a recent pull back in share prices, hedge funds are spotting value by making early-stage investments in companies going public through SPAC deals. Most of the recent bets by Asian funds have been in the so-called private investment in public equity rounds, or PIPEs, additional funding that enables SPACs to make bigger deals. Pipe rounds are usually priced at a discount, making them more attractive to hedge funds.
The likes of Sylebra belong to a different club of would-be long-term backers, using their expertise to sift through the haystack of SPAC deals to fund the next Grab, the ride-sharing startup going public through a SPAC with a valuation of almost $40 billion. The early funding rounds also avoid the frustration of not getting enough shares in hot IPOs arranged by banks.
“The nature of the SPAC listing process allows us to have a much larger participation in the early stages of these companies than we would have had through the traditional IPO process,” said Dan Gibson, chief investment officer of Sylebra, which oversees $3.5 billion.
His firm has channeled about $580 million into deals involving five SPACs since November, most of that through PIPEs. One of them made the Hong Kong-based firm the largest shareholder of PureCycle Technologies Inc., with a 15% stake.
PureCycle runs commercial plants to turn waste polypropylene — a widely used type of plastic — into virgin-like resin, using a technology developed by Procter & Gamble Co. Sylebra contributed $210 million in PIPE rounds, a stake now worth about $490 million.
The Asia-based hedge funds are joining larger global peers such as Baupost Group LLC that are targetting the SPAC sector as the flood of new entrants heightens competition for additional financing to complete mergers.
“There are also an overwhelming number of SPAC PIPE deals in the market causing institutional investors to be much more selective as they can’t process and ultimately evaluate them in a timely manner,” said Don Duffy, president of ICR Inc., a New York-based firm that advises SPACs.
The PIPE deals allow institutional investors to buy into an IPO at a discount, but it often comes with a lock-up period that reduces liquidity, said Mark Uhrynuk, a partner at Mayer Brown in Hong Kong.
“If the stock price begins to go down right after the merger, then the inability to quickly turn the holdings into cash may become an issue,” he said.
After a strong rally this year, SPACs have begun to sputter, with notable tumbles including the SPAC to be merged with Lucid Motors Inc., an electric vehicle startup. Churchill Capital Corp. IV, whose PIPE backers include BlackRock Inc., has plunged to about $22 from a high of almost $65 in February.
Rather than gambling on SPACs being able to cement attractive deals within their 24-month window, many hedge funds agree to PIPE deals only after the targets have been identified.
All of Sylebra’s capital commitments were made this way, Gibson said.