“…the line between public and private markets continues to blur.”
SPAC Arbitrage
// You hear it often from successful investors, ‘know what you don’t know.’ And I know that I don’t know quite a bit. I’ve been reminded of this lately with a lot of relatively new financial ideas and strategies being thrown around. So, I thought it would be punctilious of me to dust off the ‘ol dictionary to understand some of these terms.
Recently, SPAC’s, which have been around for decades, have started to become more mainstream.
A special purpose acquisition company (SPAC) is a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company. They are also known as "blank check companies."
SPAC’s popularity continues to grow as investors like Chamath Palihapitiya evangelize the benefits and highly visible companies like Virgin Galactic, DraftKings, and Nikola come to market.
Going one step deeper, not only can you invest in a SPAC but there’s also SPAC arbitrage. Randomly (and luckily) I came across Julian Klymochko of Accelerate in Meb Faber’s podcast “The Democratization of Alternatives…” (EP. 231). Klymochko talks about his different investing strategies, one of which is SPAC arbitrage. He does a great job of explaining the topic from 15:25 to 21:35.
Klymochko also has a good write-up in his blog titled, The Art of SPAC Arbitrage, where he goes into detail on SPAC’s, highlighting the two value drivers, yield and optionality, as well as three ways investors can earn arbitrage returns. Here is his follow up piece, Heads I Win, Tails I Still Win: Low-Risk Investing with SPAC Arbitrage.
“Clearly, we’re in a bull market for SPAC deals. However, many blank check companies are not yet pricing in this potential upside optionality.” - Klymochko
Need to Know
// Tontine
In a similar vein, this past week Bill Ackman disclosed plans for an initial public offering of a $4 billion blank check company, which may target so-called “Mature Unicorns.” The new investment vehicle named Pershing Square Tontine Holdings plans to offer 150 million shares at $20 apiece. Ackman’s hedge fund, Pershing Square Capital, will invest a minimum of $1 billion in the blank check company, while having the option to bring the total value to $6.45 billion.
Referencing the (google) dictionary one more time…a tontine is defined as…
the name of an early system for raising capital in which individuals pay into a common pool of money; they receive dividends based on their share of returns from investments made with the pooled money. As members of the group died, they were not replaced with new investors so the proceeds were divided among fewer and fewer members. The surviving investors quite literally profited from the deaths of people they knew—a feature that many considered macabre.
From Bloomberg, Bill Ackman Wants a Mature Unicorn, Matt Levine takes a more critical view and discusses the pros and cons of SPAC’s and how they compare to IPO’s and direct listings as well as how the “tontine” aspect comes into play.
SPACs usually sell investors units consisting of shares and warrants: If you invest your $20 (in this case—usually it’s $10), you get a share of the SPAC and also a fraction of a warrant to buy more shares if the deal goes through. Usually those warrants can be traded separately and are just a little sweetener for buying the stock. But in this case, some of the warrants are “tontine warrants”: Only investors who don’t demand their money back when the SPAC finds a target will get those warrants, but the number of those warrants will be fixed. The more investors redeem, the more warrants each non-redeeming investor will get. (It’s like a tontine in that, the more people drop out, the higher the value for the remaining people.) This gives investors an incentive not to redeem; in particular, it makes it less likely that a lot of investors will redeem (because the value for the remaining investors will keep going up). So Ackman has a better ability to offer certainty, because his public investors are a bit more locked in than SPAC investors usually are.
* H/T to Max Power for the help
Listen
// From Invest Like the Best, Patrick O’Shaughnessy interviews Brad Gerstner, the founder and CIO of Altimeter Capital, a multi-billion dollar technology-focused investment firm.
Public and Private Investing (EP. 179)
I originally was looking for tidbits on the public/private relationship, but, I actually found more value in how he frames his professional and personal mindset.
Some quotes that stood out:
“Far more money has been lost in this business betting on the end of times, trading out of your good ideas, trying to hedge out of Covid, than just making great bets on great companies and allowing them to compound.”
“…if you’re one of these companies that wants to participate in all of that value creation, you can’t not be in the private markets.
“You have to be disciplined. You have to have a framework. You have to live by that framework.”
Need to Know (x2)
// Direct Listings
With the recent market volatility, the number of IPO filings have, for the most part, been relatively quiet. As a result, so has the debate of direct listings vs. IPO’s. It’s a conversation that will continue and most likely gain traction if Bill Gurley gets his way. He continues his crusade with another article from Fortune, Why Famed VC Bill Gurley Thinks IPOs are Such a Rip-Off.
Related, NYSE Seeks SEC Approval for More Direct Listings (Tech Crunch)
Jamie McGurk, from Andreessen Horowitz, has the most extensive write-up regarding the process…All About Direct Listings.
Company to Know
// Capital Markets Gateway provides workflow and real-time data analytics tools that digitize capital raising for deals such as IPOs and follow-on offerings.
This week, the New York City fintech startup raised a $25M round from investors including Barclays, Citi, Fidelity Investments, Goldman Sachs, J.P. Morgan, and Morgan Stanley, in addition to existing investors including Canaccord Genuity, Franklin Templeton, Shea Ventures, and Seattle-based firm StageDotO.
If You’d Like to Know
// Private
Crunchbase Introduces Diversity Spotlight (Crunchbase)
AngelList Launches EquityList, a ‘Carta for India’ (TechCrunch)
From EquityZen…Investment Strategies for Coronavirus
Fintech Startup That Raised $100M From Investors Bessemer And Coatue Is Abruptly Shutting Down (Forbes)
// Public
How to Lose a Billion Dollars Without Really Trying (Institutional Investor)
Data
// From SPAC Data:
// Thanks
This newsletter is created and authored by Bryce Tolman and is published and provided for informational purposes only. The information in the newsletter constitutes the Author’s own opinions. None of the information contained in the newsletter constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You understand that the Author is not advising, and will not advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the information contained in the newsletter may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.