On July 30, 2022, we are honored to successfully invite Kevin Chen and James Hu to join the WIM2022 Day 2 event. They shared their experiences and insights on the Panel of SPAC.
Kevin Chen is a Chief Economist and Chief Investment Officer of Horizon Financial. He has more than 20 years of experience in the financial industry, including Hoover Family Fund co-founder and CIO. He is also a Senior Portfolio Manager and Head of Alternative Investment at Amundi Asset Management Firm. He is an Adjunct Professor at NYU, a Member of the Economic Club of New York, and the Co-Chair of the New York Finance Forum.
James Hu is a partner in White & Case’s Global Mergers & Acquisitions Practice and a member of the Global Private Equity Industry Group. He is resident in the Firm’s New York office. Mr. Hu’s practice focuses on the representation of both public companies and financial sponsors engaged in domestic or cross-border M&A or private equity transactions. He has broad experience in complex business combinations, including public company mergers, portfolio company acquisitions or sales, corporate carve-outs, SPAC transactions, and equity or joint venture arrangements. Mr. Hu represents clients across the industry spectrum, with substantial experience in M&A for technology or life science companies. Mr. Hu also serves as an adjunct professor at Cornell Law School and Cornell Tech, where he teaches an upper-class course on M&A, and as a member of Law360’s M&A Editorial Advisory Board, where he provides input to its reporters on M&A coverage.
The following are the discussions of the Panel of SPAC.
Discussion Q1:
James: Let’s maybe start by asking what types of industries or segments you do invest in or you have invested in in the recent past.
Kevin: I think for investment, ultimately, it’s all about risk and returns. What type of risk are you willing to pay, versus what type of return are you likely to get? There is no free lunch. On Wall Street, there is probably diversification. You want to be diversified because anything could go wrong. Apart from that, the higher risk, the higher return. And we have been teaching some of the introduction classes about finance, which is when you invest, consider your risk profile and your investment horizon. That’s why usually, when people, for example, approach retirement age, they should probably be buying more fixed income assets, which are closer to treasuries, municipal bonds, etc. And you got at least principals to be written to be safe, meaning much low yield. When you are young, you probably want to invest in high-risk investments. You could lose a lot of principals. But also, your return would be much higher. And if you have a whole career in front of you for your investment horizon, you would be able to include some of the losses in case it happens and also continue to grow. That’s why even for institutions, you see those endowments. Their essential perpetual horizon that they could invest in some segments, which you and I probably do not want to invest in, could have a period of very low return. But ultimately, they could get a lot of gains. For example, farmlands, forests, etc. Versus some other entities that have a limited investment horizon, you probably want to look at things very differently. That’s why investment is a very specific choice, depending on specific profiles and circumstances.
James: Yes. So that’s a typical bifurcation of the long-term investors by short-term investors.
Discussion Q2:
James: Right now, are you seeing any interesting investments in today’s environment?
Kevin: For most of the investors, right now is a high inflation time in the United States. The CPI now is 9.1%, I think. It’s probably under-reported compared with real inflation. The rent in New York City increased by 30% year-over-year compared with the same time last year. Food prices probably increased by more than 30% year-over-year for this year. The energy price doubled in the United States this year. The gas price doubled. Natural gas went up by seven times, which is 700%. German companies are paying ten times more in the energy cost. Right now, we are experiencing very high inflation. In the morning, I read an article about Great Inflation right now. And when Great Inflation happens, your fixed income and investments are really decreasing. You are seeing practically 20% to 30% of your wealth being eroded every year because of inflation. And that is why you want to invest in either high growth sectors or high cash yield sectors. Cash generating sectors could be anything related to utilities, energy – traditional energy and renewable energy, housing – apartments, logistics, data centers, and crypto mining. Whatever can generate a lot of cash flows is what you might need for high inflation time. And also, you want to invest in high-growth sectors, because high-growth sectors tend to be able to adjust by choosing inflation pressure. Our previous panels, such as Pharmaceutical and Health Care, are very typical sectors that usually the increased speed of the prices is higher than the general inflation. Another sector might be a shame to be mentioned. It is higher education – we refer to tuition for universities. These are the things that might go up much faster than inflation. But you cannot invest in those. For professional services, such as law firms, the increase of their charge is very high. So I think what is happening right now is very different from those five years ago or three years ago. For the past 30 years, there has been something called Great Moderation. From the early to mid-1980s to two years ago, the basics of the Great Moderation is 30 to 40 years with good growth and little inflation. During the Great Moderation, you could invest in things, such as bonds and fixed income, and you got a decent return. But this period was gone. Human society actually swings in between the Great Moderation and Great Inflation. During the Great Moderation, price is stable for two decades. People got used to stable prices. However, suddenly the massive inflation would kill all those fixed incomes. We could call it Great Reset. We could also call it Great Wealth Redistribution. And I think what is happening right is that for our investors, the first thing that we need to consider is the Great Inflation now.
James: So I guess the key takeaways is that either invest in companies that can outbound the inflation - those with high growth rate, or identify the companies or investments that have the pricing power. The point is that you need somebody who can pass on the right cost to its customers, rather than being stuck in the middle.
Discussion Q3:
James: Please share some observations in the SPAC business for the last 18 months.
Kevin: Sure. First, in fact, the SPAC business model was invented by some NYU law school people 20 to 25 years ago. Any industries all have its ups and downs. I believe that two years ago, this business model was very hot. This year, SPAC experienced several challenges. In the media, you would see a lot of negative about SPAC. I totally understand this, because of Negativity Sales. In the media, it has been continued for hundreds of years that if you want to sell newspapers or clicks, you want to portraiting bad things. People are naturally interested in bad things. Therefore, you could see a lot of bad news about SPAC right now. However, I think in reality, the SPAC is pretty balanced. In the SPAC industry, there are some deals that went bad, and some deals went extraordinary well. I am aware that several deals recently went very well in the AI space. In general, I think SPAC is very good for growth companies. If you have very stable income yield industries, you might not be suitable for SPAC. SPAC is a tool that is good for high-growth sectors. That’s why you might see SPAC is often involved with Biotech, Fintech, AI, and anything related to technology. But you might not see a lot of traditional sectors involved with SPAC. It is more about how you look at the future.
James: Yes. You mentioned that the populous slams in the media might influence public opinions. They tried to see some handful of SPAC deals that went wrong. The public opinions are built on these slams, which might not be fair. I think people should be mindful of this. For example, when you buy Apple, you look at the public perception, which may or may not be true. And if you are comparing a company that went through a SPAC merger to be public with a company that went through the IPO, as long as you are looking at the same sector, I am not sure that you will see a lot of divergences. The fact that when people are saying SPAC deals are underperforming, is probably because of bias, because SPAC tends to focus more on early-stage riskier companies. It is also unfair to compare these sample-size companies with more diversified IPO-candidate types of companies as well. When looking at views, it is better to have a balanced view and understand what is right.
Discussion Q4:
James: Let’s maybe cover a little bit about international investments, maybe, especially between Asia and the United States. Or, particularly, we could focus on China and the United States. I am curious about your observations most recently or perhaps even further back.
Kevin: Right now, we are not involved with any deals in China. It is difficult in this climate to do any deals in China. But I think cross-border deals are still an important and viable choice. Because I think the stock market of the United States has always been very liquid. And it is still counted towards roughly 50% to 60% of the global stock market caps or trading volume here in New York City. And for a lot of companies, such as in Europe, it is more advantageous to be listed here. So if you look at it from an arbitrage point of view, for an American company or an American SPAC to go to Europe and buy the asset, and do the deals in the United States, they tend to get a much higher valuation in the United States than a stock exchange company in Europe. This is one approach. Another approach is for a lot of Southeast Asian companies, they have high growth. However, in Southeast Asia, there is not a strong stock market, from an investor’s point of view. Therefore, it is ideal for these companies to do a merger deal transaction with the American company, including SPAC, and then take advantage of listing here in the United States. And also, the branding effect in Southeast Asia is very good. If your company is listed in the United States, such as on the New York Stock Exchange, it will help your business to grow tremendously in any of these Southeast Asian countries. A third approach is that for high-growth companies, I noticed those successful companies in, such as Israel, Dubai, Abu Dhabi, and Ukraine, have headquarters or management in the United States at a legal entity, such as New York and Silicon Valley. They have their own client services, marketing, and main IT operation based in Israel, Ukraine, and others. In this way, they can have a lot of service leap in these counties. And on the other hand, they can keep their legal management in the UnitedStates, and maintain in the American capital market. I think this is a very successful approach for cross-border deals to happen. Given the geopolitical issues in Europe now, it is not an easy way to go public or be merged for companies from East Europe or from the Middle East. For them, to be traded in the United States seems to be the only choice.
James: For every cross-border transaction to happen, there should be a need on either side. There is a famous sentence previous that if you are buying stocks in the United States, you know what you are going to get. You also know all the investment protections from several perspectives and all the enforcement from the private sectors. By far, the largest security market to entering is the United States. This will also carry on. At least in the near future, it will always be like this.
Discussion Q5:
Audience 1: What do you think will happen for the Holding Foreign Company Accountable Act that will delist Chinese companies in the United States in the next one to two years?
Kevin: I can say, in the ideal world, if we put the political problems between two countries aside, we should we can learn a lot from the Jewish people. Because during my travel, they told me that this should be something that you are doing in Chinese. You can have your research and IT people based in Israel. You can have the board and registration in the United States. You can also have tiny offices and do some marketing in the United States. These companies like this will be treated well in the United States, as an American company. There are no more political issues under this circumstance. This is what the Jewish people are doing. And they have done it successfully. These Jewish people said that you should learn from it. Because as a foreign company, you always face more hurdles than an American company. You could become a domestic company to solve the problem.
James: I agree with you. If the idea is to access the capital market in the United States, there are some burdens and restrictions associated with that. We could also call these burdens and restrictions expectations. So it is part of the cost of being able to access the great United States capital markets that we just described. You should not come as a surprise. There is a way to manage that, even though there are laws regarding that. Lawyers have ways to avoid that with cost. Maybe some of the companies choose to be listed in Hong Kong. But it is their own judgment.
Kevin: And I also want to add another point that it is not only in China but also in India. In India, they have very restricted policies. If you look at most of the successful companies recently in India, they did the same thing as the Israeli companies did. Companies registered in the United States and have 98% to 99% of revenue and labor in India are successful. That is why I suggest some Chinese companies could consider doing.
Discussion Q6:
Audience 2: Within the rising interest rate environment, how are we forecasting the M&A activity in the near future?
Kevin: A lot of the fast early-grow companies started during the depression. Because in the down term, people are more realistic. Using the example of Israel, six months ago, people had unrealistic expectations of valuation, growth potential, and what they could get. But for now, they have become more long-term oriented. Good companies with good products or services will still be successful, but for a longer time. This is also good for the long-term.
James: When the valuation is very high, as long as it is settled, you will see transactions. When the valuation is very low, as long as it is settled, you will also see transactions. We are in the intermediate space where things are uncertain. When the buyers and sellers cannot come to terms – because the buyers have unrealistic expectations and the sellers have downside expectations – the valuation range will not be overlapped. For a deal to happen and for people to transact, the valuation range has to convert. We are in this intermediate space where people’s consensus has not been formed. When a consensus is formed, you will see activities picked up again.