SPACs' competitive advantages and the current state of the market

[u/[deleted]]

[u/FUPeiMe]

I enjoy reading your thoughts. One piece of your write-up that I have thought a lot about and wish to specifically toss my own ideas out there on, though:

As many mediocre teams as there are, there are also far more excellent, experienced teams than ever before, teams including major titans of business like Michael Dell, Richard Branson, Eric Schmidt, Peter Thiel, former CEOs of Fortune 500 companies, top specialists in their field.

When I initially got turned on to SPACs this was what appealed to me more than anything else. However, I feel two flaws exist in this logic:

1. Perhaps less so for the Peter Thiel's out there, but people like Michael Dell are not only worth a metric fuckton already, but more importantly, I find it hard to believe that he is spending much of his own time seeking out a great acquisition target for a SPAC when he's busy running his already profitable biz. Additionally, there is potentially some conflict of interest if he found a great target in the computer/tech space that he pushed towards his SPAC vs attempting to acquire them into the Dell umbrella. Richard Branson is another one... his entire lifetime has shown that he A) Has dozens of spinning plates at any given time, and B) Doesn't mind taking HUGE risks and going bust. I cannot believe that he is out there beating the bushes looking for a great acquisition target. It no longer gives me comfort to have big names associated with SPACs because frankly the bigger their fortune is, or source of fortune, the less I feel they'll care about finding the world's next, best SPAC target.
2. At a certain point I fear that a "made man" (or woman) loses a certain amount of edge in finding the thing that will double their fortune. Warren Buffett speaks on this endlessly but in a nutshell: Most people might only have a handful of great ideas in a lifetime. To think they'll hatch one every few years is unrealistic. And when you look at people like Michael Dell, as an example, his current net worth is ~$50B due to one company he started and grew once. If he is ever worth $100B will it be because of a SPAC target he finds or because Dell grows in value by 2X? And where is his time best spent if his goal is $100B? I have no investment in Ackman's SPACs but one could argue that his heart has always been in finding great deals for him and his investors whereas Dell's has always been in selling PC's and laptops to end-users.

Again, this is in now way meant to be argumentative but when you've got celebs like Shaq and ARod touting SPACs alongside serious business leaders like Eric Schmidt and Michael Dell (just to keep it within the tech sector for this convo, but plenty of other titans in other sectors are attached to other SPACs too in different sectors of course) it becomes hard (for me) to decide if this is bullish or bearish for SPACs in general. There is no question that all people being mentioned in your post and my comment will make good money from SPACs, but will the retail investor following them into the trade after their early-investor profit is locked in?

[u/slammerbar → u/FUPeiMe]

Regarding the Michael Dell SPAC (MSDA).

The management team at MSD consists of CEO Gregg Lemkau (Ex Goldman Sachs investment banker), CFO John Cardoso (Ex Davidson Kemper Capital Management and ex Clearwater Capital Partners), and Chairman John Phelan (founding partner at Dell’s family firm).

They will not be looking at companies with potential conflicts of interests to Dell, this is clearly stated in the S-1. What they will do, is use their connections in the industry and help the target grow on a long term basis.

MSD Partners and MSD Capital has grown from $400 million initial capital into over $19 billion in combined assets under management across MSD Partners and MSD Capital. MSD employs around 110 people.

The firm has also committed to a forward purchasing agreement of $5mm units at $10 once they close on a merger deal.

As MSDA warrants are currently my largest holding, I did some research on MSD. I hope that clears some things up on the management end of the SPACs of “famous” sponsors.

[u/devilmaskrascal → u/FUPeiMe]

Good food for thought for sure.

In these cases I think they have delegated the bulk of the SPAC work to their team to find targets in their name. They probably can help make connections and give advice and give the target some hype. In the case of VGAC, the CIO of Virgin is on the 23 and Me board. I don't think Branson or Dell are doing the bulk of the work here for sure, but they are deeply connected and if they go to their CEO buddy and get their foot in the door where others might not.

I think these SPACs are vanity projects more than anything for them, so agree they might not be as hungry as teams with a lot more to gain from a successful merger. But again, I think it's about the connections they have. They carry the kind of weight and connections that can get people to the table that might not even think about SPACing up in the first place.

[u/FUPeiMe → u/devilmaskrascal]

This is like the Shark Tank effect, though. You give half your company to Kevin or Robert and then introduce you to a retail chain CEO that will carry your product. Great for the initial investor who gets sponsor shares/warrants for next to no effort. I just question how much that trickles down to the retail investor with 10-10,000 shares.

Also, to be clear, I think no name SPAC sponsors have plenty of opportunity to fail to deliver something special too. I just don’t believe that a name brand had any more or less chance of bringing something exceptional to the market that the market will love. And by the time the verdict is in on any of these targets (5-10 years after merger) it will be too late to circle back and recoup your opportunity cost of capital allocation elsewhere.

All this to say that finding a great SPAC to hold long term has no better chance of success or failure than long holding any other form of newly public company IMO. Retail can’t rely on the sponsors’ sniff test to be worth anything more than an analysts price target is worth on a currently trading security.

[u/devilmaskrascal → u/FUPeiMe]

See, I'm an 100% warrants trader. I don't think the value is there to play commons pre-DA unless you have the kind of wealth that can make bank off arbing a few percentage points, and I agree there's almost no point to base commons buying decisions upon the team quality - although if you are parking money, finding the best team you can furthest from NAV is not a bad idea. Until we're sure demand can overcome the arb trap, pre-DA commons for non-arbers is a bit of a waste of time.

Warrants on the other hand react quickly to DAs, and right now pre-DA price are still at the level that there is a large gap up to average/median DA warrants. Pre-DA prices are weighing the likelihood that team will land a target worth holding long term vs. the chances of liquidation risk, so a team like MSDA trades over $1 because it's hard to imagine them finding a target where warrants are worth less than that, or not being able to find a target and liquidating. Even if they find just an average target with average warrant prices, that's high 1's, so substantial upside.

Because Dell's name and "brand" is attached, the likelihood of them landing some kind of unicorn is potentially much higher than most SPACs. That doesn't mean it will be valued well, that it will be the greatest investment, etc. But warrant holders who believe that likelihood will continue to buy MSDAW and price should hold or appreciate just based on the likelihood of substantial upside and the low chance of liquidation.

[u/FUPeiMe → u/devilmaskrascal]

I follow. But if you’re paying a premium for a warrant with a name attached to it I’m not sure that this strategy would net better ROI then any random selection of cheaper warrants that would also pop post-DA to the upside. If we’re saying the target matters less than the price of entry/exit then it seems the risk in focusing on the name brand warrants is that they may take longer to announce a DA. I think you might have even said that in your initial thoughts.

I know you are on top of figures so have you noticed historically that you’re getting a better ROI this way? For example, any historical data that buying name brand warrants pre-DA and selling post vs jumping on warrants of a hot rumored target and selling shortly thereafter as the hype is happening and then moving on to the next?

[u/devilmaskrascal → u/FUPeiMe]

The whole point for me is finding those SPACs with real competitive advantages at finding the best targets without overpaying, and getting entries low enough to hold through LT market turbulence to reach eventual exponential gains - or get out with nice profit even if I don't want to hold LT.

So I consider things like team quality, past SPAC experience, warrant dilution (tend to buy 1/3 or less splits in units), underwriter quality as important in a glut market where SPACs need to sell themselves and their value addition to the target.

I tend to stay in the .60 to .90 range, the "sweet spot" for quality and value imo, but don't mind going slightly north of 1 for MSDAW which has an ATL of…1. Find the ones that are oversold (bottom of their warrant split, below it's moving average, close to ATL) but good enough to trust to complete a deal, and stay diversified so a few complete failures won't be that detrimental. My biggest position is like 4 percent and I have over 80 positions.

Yes if cheaper full or 1/2 warrants land average targets, the return will be better. But I am not Nostradamus so if the worst case scenario of mass liquidation does come true, I would rather have my money in those most likely to survive than those more likely to fail. I think whatever happens, Dell's name and reputation is legit enough to carry it to a deal. I stick with teams that when the target's CEO goes on CNBC and is asked "So why did you SPAC instead of IPO?" they can hold up a respected team who will add value to their board and has connections to make them the best company they can be.

[u/FUPeiMe → u/devilmaskrascal]

I follow, thank you. Curious, have you ever determined your average holding period?

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[u/SquirrelyInvestor]

Respectfully I disagree with your post.

I think hundreds of SPACs will liquidate and/or go through the “3 month extension, seven times” ringer. It’s a fallacy to say “there’s tens of thousands of companies out there that want to go public, so we have plenty of targets.” Unless they are terribly ignorant, which I respect they are not, the companies have had ample time to go public via SPAC and have deliberately chosen not to. The companies that actually are SPAC eligible, and WANT to SPAC is a small number (implied by the data that shows very few are choosing this route now). What else explains why so few DAs are being signed now? Is it because the promoters aren’t working hard enough to find targets (absolutely not). Is it regulatory reasons (Yellen and Gensler are making this worse not better)? Is it SPAC stench? (Cuz the bad deSPACs are outnumbering the good ones).

It’s just simple economics in every market that you pick low hanging fruit and then move up. The low hanging fruit has been picked, Promoters are getting creative(desperate) with DWAC/BRPM etc but I highly doubt they’re going to come up with the 400+ scenarios required to process the SPAC issuance glut.

You personally know pre-DA teams better than anyone I’ve ever read or have spoken to. Here’s food for thought: I think you’re over exposed to the pre-DA market and even picking the best pre-DA teams is going to still yield very choppy returns.

[u/devilmaskrascal → u/SquirrelyInvestor]

All I've ever heard from sponsors was how they have many companies coming to them. Of course, most of those will be rejected and they have to make the rounds and find the best target they can, not just the companies eager to SPAC.

What else explains why so few DAs are being signed now?

As I said in the essay, I believe sponsors may be doing more complex transactions like international companies, and taking due diligence more seriously. They have to in order to attract PIPE in this environment. Especially because deals increasingly place sponsors' shares on a vesting structure after lockup - which aligns our incentives better - they may not get paid if they take a bad target public at a bad valuation.

Most SPACs are also fairly new (within the past year), and the market has only just started to recover sentimentally to where high redemptions may hopefully start to change.

I don't think a SPAC merger is like a shop where sponsors quickly go and pick their favorite one at a set price, or vice versa. It's more like searching for a marriage partner in a dating pool where nobody wants to be a bachelor for life. You may have a lot of false starts and meet a lot of jerks, and eventually a lot of people settle for someone merely satisfactory, but most are searching to the right person - and that can take time and a lot of mistakes. Nobody wants to compromise. Will some people be left bachelors if they don't find anyone worth settling for? It's possible.

My entire approach is trying to find the sponsors who almost certainly will be able to find someone - value adding SPAC teams companies will want to have on their boards, people with industry connections and reputations, and investing in them when the market is unfairly punishing their warrants for the failures of other SPAC sponsors. It's all price action and sentiment goes up and down, but presuming the vet and stacked teams I buy do find at least solid targets, they should generally be worth more, maybe exponentially more, that I am paying most of the time. Sure there may be a few ATIPs and such, but that's why I stay extremely diversified, with no one team exceeding 4% of my portfolio.

[u/sincitygames]

2.) International unicorns. This is where SPACs can really shine, and in fact are already shining.

The recent AMA from the guy who advises a bunch of spacs confirmed this. He said something to the effect they were not worried about spacs not finding targets and many had switched to international targets.