Finance

Emerging markets now in sights for blank-cheque companies

Blank-check companies are venturing to far-flung locales such as Brazil, Israel and Turkey to find attractive merger targets these days.

Special-purpose acquisition companies, or Spacs, explicitly pursuing companies in Asia, Latin America, Eastern Europe, the Middle East and Africa remain a small part of the overall market. But they are growing at a faster clip than their conventional counterparts, according to The Wall Street Journal’s analysis of data from Spac Research.

Sixty new Spacs focused on emerging markets filed documents with the Securities and Exchange Commission in the first half of 2021, almost triple the number for all of 2020, according to the analysis. The number of non-emerging-market Spacs grew by about 67% to 515 over the same period.

The surge coincides with mounting competition that has driven up purchase prices, and a selloff that has buffeted the US Spac market in recent months.

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Spacs are shell firms that raise money on stock exchanges, then merge with private companies and take them public. With so-many buyers chasing deals in the US, blank-check companies are more likely to overpay or to purchase speculative businesses because they must close deals within two years of launching or give investors their money back. The bidding wars have grown so heated that Wall Street insiders have taken to calling them Spac-offs.

“People are finding two Stanford dropouts with a twinkle in their eye and a plan to colonize Venus and giving them $2bn,” said Daniel Freifeld, founder of Callaway Capital Management, a money manager focused on emerging markets.

Callaway completed a $125m Spac in July that listed on the New York Stock Exchange and is targeting Turkish financial-technology companies.

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Turkey is a prime example of the risks that foreign investors take playing in developing markets. Political instability, high inflation and erratic monetary policy have sent the country’s stock market and currency into a tailspin despite the global economic recovery this year. The Turkey BIST 100 stock index lost 5.2% in 2021 through Aug. 2, making it the third-worst performer of the global benchmark indexes listed by FactSet.

“Nowhere in the world is cheaper than Turkey right now,” Freifeld said.

Still, the country’s banks and insurance companies are well capitalized and its young population is underbanked, creating strong growth prospects for the financial sector, according to Freifeld, who says Turkish assets are unlikely to fall much further.

Most Spacs focused on emerging markets list on US stock exchanges, where relatively stringent reporting and regulatory requirements give investors comfort, said Matthew Simpson, managing partner at WealthSpring Capital, which has about $750m it invests in Spacs. They also give Spac investors a way to reduce concentration in the U.S., where lofty valuations and warnings from regulators have recently sparked a sharp selloff.

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“We actually like adding a lot of foreign-focused Spacs in our portfolio because it adds diversity,” Simpson said.

Most emerging-market-focused Spacs are targeting Asia — Southeast Asia’s Grab Holdings in April said it would go public via a Spac in a deal valuing the company at $40bn — but technology hubs in other regions such as Brazil and Israel are also attracting interest.

For companies in developing countries, Spacs offer an opportunity to access the deeper pockets, and potentially higher valuations, of US stock markets, said Mario Mello, a partner at Valor Capital Group, which raised a $200m Spac in May to list on the Nasdaq stock exchange targeting Latin American technology companies. Valor raised its funding from large money managers including Blackstone and SoftBank, according to its filings with the SEC.

Larger Brazilian companies such as StoneCo, PagSeguro Digital and XP launched initial public offerings directly in the US in recent years. The evolution of Spacs is now opening the door to smaller enterprises that are in earlier growth stages, Mello said.

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The potential universe of Spac buyers of emerging-market companies is broad because almost all of the blank-check companies listed in the US have the option to shop overseas, said Grant Miller, head of investment bank Cowen’s capital-markets division. Five of the six Israeli firms that announced plans to merge with Spacs this year went to blank-check companies that weren’t explicitly focused on emerging markets, he said.

Israel is particularly fertile ground for Spacs because it has a robust technology sector with deep ties to the venture-capital industry, Miller said. Digital-advertising company Taboola.com listed on the Nasdaq in June via a Spac, and mobility company REE Automotive has disclosed plans to do the same.

Write to Matt Wirz at [email protected]

This article was published by Dow Jones Newswires

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