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SPAC Investing


EricSchleien
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I was wondering if anyone on this board has any experience investing in SPACs.  How do you go about finding them & researching them.  For me, I have found them always by accident or through Value Investors Club.  Any suggestions or guidance?

 

There are various websites that list new SPACS. Some even provide an alert service to send them to your email. Beware the SPAM though. As for the guidance, I would just be aware of all the risks involved. The obvious one is that it is basically a blank check company. Also, the majority of the value is in the warrants attached the common units. When decoupled, the common units would likely get diluted away upon a deal. And the warrants can come up worthless upon no deal in the required time frame listed in the SPAC's 424B filing. I've only dabbled in them once many years ago. I actually got a very nice return on the warrants, but I was lucky, b/c i really had no idea all the risks involved at the time (I didn't know what i was doing, just got lucky). Also most all SPACs have a forced redemption provision whereby, the profits on the warrants can be capped. The management team of a SPAC typically receives 20% of the equity in the vehicle at the time of offering, exclusive of the value of the warrants. The unique benefits are the special rights of shareholders to vote in approval or rejection of the deal and the ability for investors to regain most of their funds, typically greater than 98%, if the SPAC fails to generate an acquisition. As valuegeek mentioned, sometimes you can find SPACs that are trading below cash in trust amount.

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These may be good arb plays but I have yet to hear of a successful SPAC purchasing an undervalued company.  Has anyone seen one?  All the incentives are for managment to do a deal at all costs.  Typically, the founders warrants only come into exsitence if a deal is done. 

 

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  • 10 years later...

Here are some interesting SPACs in the tsunami of the many.

 

HPX - this is headed by Bernardo Hees. When he was at 3G he was involved in the 3G partnership deals with Berkshire. He was CEO of Burger King (Burger King went public via SPAC). He was CEO OF Kraft Heinz. He was also CEO of a large Brazilian logistics company. This could be interesting for two reasons:

1. Looking for something in Brazil not US so no competition from 10,000 otherc SPACs

2. Better incentive - He has great executive experience nd would likely take a long term interest with a board seat in the acquired company

 

LMCA - Liberty Media and Malone

No need to mention his track record. Interesting to see what his team will come up with.

 

The Charlie Munger SPAC, in conjunction with DJC. This has not yet IPO’d yet but the S-1 was just filed with the SEC. looks like he’s targeting a fintech startup.

 

The Howard Marks - second SPAC. First one is complete.

 

PS...the Munger one is a joke, it’s not real. The others are real.

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A few other SPACs of interest.

 

VYGG (12.3) - Alexander Tamas, very early investor in FB, Reddit and one of the most highly regarded dealmakers in the VC world.The Board has some marquee names from the tech world. Rumoured to be targeting Reddit.

 

AVAN (10.75) - Large European SPAC with a famous telecom billionaire at the helm. Europe is not crowded unlike the US so more likely to get a good deal. Rumoured to be targeting Klarna. Baupost and Citadel both own big stakes in this SPAC.

 

HZON (10.87) - Led by LA Dodgers owner/Draft Kings founder/ex-Netflix content exec. Targeting Media/Entertainment (e.g. Discord/Soundcloud/Cameo?). Baupost owns a stake here.

 

 

 

 

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On AVAN, I think you would find that Citadel owns a sizable position in most of the SPACs. This is due to their role as a market maker and not them investing out of merits.

 

On VYGG, I put them taking Reddit public at 1%. There is a huge conflict of interest there.

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I wouldn’t give Warren Buffett a 20% finders fee, let alone the rest of these yahoos.

 

By that logic you should never own any listed stock since 2-4% bankers fee has been paid on almost any of the them when they got listed. That is what this is in aggregate - Bankers fee in another form. It’s just a funnel that is bringing hundreds of new companies to the listed market. But of course a lot of them would be average or below by definition but so will there be some exceptional ones. But sure focus on a wrong tree and miss the forest.

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It's less of a "finders" fee and more of a "success" fee. People like to talk about how if the SPAC doesn't find a target, or the investor doesn't like the target, they can redeem their money and get everything back, even in a liquidation. In a liquidation, the sponsor loses all their money. So the promote is really compensation for assuming all of the downside risk in the event they liquidate. It's not perfect, but the risk/reward profiles are very different for the sponsor vs. investor and I do think its appropriate for the sponsor to have higher economics because of this. However, 20% may be high.

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It's less of a "finders" fee and more of a "success" fee. People like to talk about how if the SPAC doesn't find a target, or the investor doesn't like the target, they can redeem their money and get everything back, even in a liquidation. In a liquidation, the sponsor loses all their money. So the promote is really compensation for assuming all of the downside risk in the event they liquidate. It's not perfect, but the risk/reward profiles are very different for the sponsor vs. investor and I do think its appropriate for the sponsor to have higher economics because of this. However, 20% may be high.

 

I agree with this, but am curious how much skin the game a sponsor would typically have? Between d&o insurance, underwriting, listing fees would the sponsors typically be putting up say 5% of the amount raised? Be curious for any rule of thumb...

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It's less of a "finders" fee and more of a "success" fee. People like to talk about how if the SPAC doesn't find a target, or the investor doesn't like the target, they can redeem their money and get everything back, even in a liquidation. In a liquidation, the sponsor loses all their money. So the promote is really compensation for assuming all of the downside risk in the event they liquidate. It's not perfect, but the risk/reward profiles are very different for the sponsor vs. investor and I do think its appropriate for the sponsor to have higher economics because of this. However, 20% may be high.

 

I agree with this, but am curious how much skin the game a sponsor would typically have? Between d&o insurance, underwriting, listing fees would the sponsors typically be putting up say 5% of the amount raised? Be curious for any rule of thumb...

 

Yes, typically it is 4-8% of the amount raised. So, unless the sponsor funds their investment out of an existing PE or HF vehicle, I think its fair to say they have a good amount of skin in the game. If they are funding with LP $s then the promote is really for the benefit of the LPs and the GP maintains their existing fee terms.

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Amid many overpriced deals, there is one that is not. FGNA/OppFI. A lender to non-prime borrowers for very small loans. Led by an ex GS and trading at 9x PE with 50%+ historical CAGR. Some regulatory risks obviously but you'd underwrite them at this valuation. NPS is 80+. SPAC is led by Joe Moglia who grew TD Ameritrade 30x during his tenure. 

 

https://d1io3yog0oux5.cloudfront.net/fgnewamerica/files/pages/fgnewamerica/db/926/description/Investor+Presentation+%2802.10.2021%29+final.pdf

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I wouldn’t give Warren Buffett a 20% finders fee, let alone the rest of these yahoos.

 

By that logic you should never own any listed stock since 2-4% bankers fee has been paid on almost any of the them when they got listed. That is what this is in aggregate - Bankers fee in another form. It’s just a funnel that is bringing hundreds of new companies to the listed market. But of course a lot of them would be average or below by definition but so will there be some exceptional ones. But sure focus on a wrong tree and miss the forest.

 

Minor nit, IPO fees are typically 7%, and even direct listings pay the bankers (Palantir paid $50M+ in fees if my memory is correct). Correct me if I'm wrong, but I see a big difference between buying SPACs before they've merged with their target, and buying any stock, including a former SPAC, after those fees are paid. In the second case I'm not paying the fees, the previous owners took the value hit. And my understanding is that in general, buying SPACs before their merger has not done well historically. Finally given the market is fully valued, I would also worry about the performance of new SPACs going forward.

 

But as you all have pointed out in response to my grumpy denunciation, it all depends. Sub-par returns from a class isn't proof there aren't super profitable individual opportunities in them.  So now after further consideration I must flip flop. If WEB launched his own SPAC, I would very likely invest, and if I"m going to buy into the "great man" theory of coat-tail riding, that also means there are likely at least one or two other existing SPACs I'd be interested in if I did the due diligence on their sponsors.

 

Which also means I just publicly outed myself as a bombastic liar and a hypocrite, all in under 24 hours;) Making me the first one ever on the internet, I think?

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I feel like I’ve joined Scientology, ive gone all in on SPACs the last couple months. Guess I don’t really think of this as an investment, it’s in a different bucket.

 

I’ve essentially given funds to some smart investors and CEOs including Reed Hoffman, Malone, Peter Thiel, Howard Marks, Bernardo from 3G, Betsy Cohen, and some others.

 

I also get free call options with some warrants (1-3 or 1-2 ratio to the units) and essentially a free put with the redeemable units at 10 (I’ll likely never redeem them no matter what happens, but just because this exists it creates a market floor at $10 - just take a look at how they performed during March 2000)

 

Someone please convince me why I should sell them.

 

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I feel like I’ve joined Scientology, ive gone all in on SPACs the last couple months. Guess I don’t really think of this as an investment, it’s in a different bucket.

 

I’ve essentially given funds to some smart investors and CEOs including Reed Hoffman, Malone, Peter Thiel, Howard Marks, Bernardo from 3G, Betsy Cohen, and some others.

 

I also get free call options with some warrants (1-3 or 1-2 ratio to the units) and essentially a free put with the redeemable units at 10 (I’ll likely never redeem them no matter what happens, but just because this exists it creates a market floor at $10 - just take a look at how they performed during March 2000)

 

Someone please convince me why I should sell them.

 

Were you able to buy all of those at $10 in the IPO? I think the risk reward is materially worse the further away from $10 you get.

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i'm not sure this has any significance but it sort of rhymes.

Yesterday, there was a new filing with the SEC for a new blank-company venture called: "Just Another Acquisition Corp.". The purpose is not clear..

In another period of financial innovation (1720, South Sea company and related capital raises), a prospectus contained the following: “a company for carrying out an undertaking of great advantage, but nobody to know what it is.”

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i'm not sure this has any significance but it sort of rhymes.

Yesterday, there was a new filing with the SEC for a new blank-company venture called: "Just Another Acquisition Corp.". The purpose is not clear..

In another period of financial innovation (1720, South Sea company and related capital raises), a prospectus contained the following: “a company for carrying out an undertaking of great advantage, but nobody to know what it is.”

 

My favorite is still LMAO, sponsored by LMFAO

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Interesting story from Matt Levine today.

 

Waitr Inc. never had the resources of rivals Grubhub Inc. and UberEats. Yet in November 2018 the online food ordering and delivery business went public through a merger with blank-check firm Landcadia Holdings Inc.

 

Landcadia had some powerful names behind it. Tilman Fertitta, a billionaire restaurateur, and Richard Handler, the chief executive officer of Jefferies Financial Group Inc., had raised $250 million in backing for Landcadia so that the special purpose acquisition company, or SPAC, could find and take public a promising startup like Waitr.

 

But Waitr turned out to be a disappointment. Its shares plummeted as it lost about 96% of its market value in 2019, down from a high of almost $1 billion. That triggered a class-action lawsuit claiming that Fertitta and Handler misled shareholders about the risks of Waitr’s business plan but pushed ahead with announcing their merger two weeks before Landcadia had to return investor money, as it promised.

 

Now, in what could soon be the first ruling of its kind since last year’s record number of SPACs went public, a federal judge is weighing to what extent sponsors of these ventures can be held liable for failing to deliver. A hearing is set for March 16 and a ruling could come shortly afterward. Landcadia, Waitr, Fertitta and Handler deny wrongdoing and are urging the judge to dismiss the case.

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The Muger DJC Q&A was great, wish he would have rambled more but The questions asked what exactly what I would’ve wanted to ask Munger.

 

SPACs got annihilated last week. Almost everything, even with deal announcements is back to near NAV. I think at this point it is a great value when you add the arbitrage put protection and call incentive.

 

There are quite a lot of value investing legends involved:

 

SPACs - Howard Marks, John Malone, Bernardo from 3G, Howard Marks all have SPACs. Also Bill Ackman

 

Investments - Seth Klarman has investments in a few SPACs. I had to check that twice when I read this but Seth also just did a PIPE in Reid Hoffman’s SPAC that merged with an eVTOL Joby with 4.6B EV valuation. He also owns shares in addition to the PIPE. I always thought Seth Klarman was doing this as arbitrage. But with the PIPE investment They’re locked in for five years. And by summer this year, the $10 floor arbitrage becomes $0.

 

Why is Seth Klarman investing in flying cars?

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