How hedge fund traders known as the SPAC Mafia are driving an $80 billion investment boom with a no-lose trade.
If you want to see the future of so many of the special purpose acquisition companies currently flooding the market, look to the recent past. Nearly five years ago, Landry’s Seafood billionaire Tillman Fertitta took Landcadia Holdings public to the tune of $345 million. No matter that, true to the SPAC “blank check” model, there was not yet any operating business—dozens of hedge funds piled into its $10-per-unit IPO.
In May 2018, Landcadia finally located its target: a budding online restaurant delivery service called Waitr that would merge with the SPAC in exchange for $252 million in cash. Fertitta touted the fact that the Louisiana startup, with $65 million in revenue, would now have access to 4 million loyalty members of his restaurant and casino businesses, and a new partnership with his Houston Rockets NBA franchise. Two years later, though, you very likely have never heard of Waitr. As such, its stock recently traded at $2.62, down more than 70% from its IPO price (the S&P 500 has climbed 76% over the same period).
Waitr was a disaster for pretty much anyone who bought the stock early. But the hedge funds that purchased Landcadia’s IPO units did just fine. Virtually all recouped their initial investment, with interest, and many profited by exercising warrants in the aftermarket. “SPACs are a phenomenal yield alternative,” says David Sultan, chief investment officer at Fir Tree Partners, a $3 billion hedge fund that bought into Fertitta’s Landcadia SPAC IPO—and pretty much any other it could get its hands on.
The SPAC boom of 2020 is probably the biggest Wall Street story of the year, but almost no one has noticed the quiet force driving this speculative bubble: a couple dozen obscure hedge funds like Polar Asset Management and Davidson Kempner, known by insiders as the “SPAC Mafia.” It’s an offer they can’t refuse. Some 97 percent of these hedge funds redeem or sell their IPO stock before target mergers are consummated, according to a recent study of 47 SPACs by New York University Law School professor Michael Ohlrogge and Stanford Law professor Michael Klausner. Though they’re loath to talk specifics, SPAC Mafia hedge funds say returns currently run around 20%. “The optionality to the upside is unlimited,” gushes Patrick Galley, a portfolio manager at Chicago-based RiverNorth, who manages a $200 million portfolio of SPAC investments. Adds Roy Behren of Westchester Capital Management, a fund with a $470 million portfolio of at least 40 SPACs, in clearer English: “We love the risk/reward of it.”
What’s not to love when “risk” is all but risk-free? There’s only one loser in this equation. As always, it’s the retail investor, the Robinhood novice, the good-intentions fund company like Fidelity. They all bring their pickaxes to the SPAC gold rush, failing to understand that the opportunities were mined long before they got there—by the sponsors who see an easy score, the entrepreneurs who get fat exits when their companies are acquired and the SPAC Mafia hedge funds that lubricate it all.
It’s about to get far worse for the little guy. Giant quant firms—Izzy Englander’s Millennium Management, Louis Bacon’s Moore Capital, Michael Platt’s BlueCrest Capital—have recently jumped in. Sure, they all raised billions based on algorithmic trading strategies, not by buying speculative IPOs in companies that don’t even have a product yet. But you don’t need AI to tell you the benefits of a sure thing. And that means torrents of easy cash for ever more specious acquisitions. Says NYU’s Ohlrogge: “It’s going to be a disaster for investors that hold through the merger.”
In the first 10 months or so of 2020, 178 SPACs went public, to the tune of $65 billion, according to SPACInsider—more than the last ten years’ worth of such deals combined. That’s just one indication that the current wave of blank-check companies is different from previous generations.
In the 1980s, SPACs were known as “blind pools” and were the domain of bucket-shop brokerage firms infamous for fleecing gullible investors under banners such as First Jersey Securities and The Wolf of Wall Street’s Stratton Oakmont. Blind pools circumvented regulatory scrutiny and tended to focus on seemingly promising operating companies—those whose prospects sounded amazing during a cold-calling broker’s telephone pitch. The stockbrokers, who typically owned big blocks of the shares and warrants, would “pump” prices up, trading shares among clients, and then “dump” their holdings at a profit before the stocks inevitably collapsed. Shares traded in the shadows of Wall Street for pennies, and the deal amounts were tiny, typically less than $10 million.
In 1992, a Long Island lawyer named David Nussbaum, CEO of brokerage GKN Securities, structured a new type of blank-check company, with greater investor protections including segregating IPO cash in an escrow account. He even came up with the gussied-up “special purpose acquisition company” moniker.
The basics of the new SPACs were as follows: A sponsor would pay for the underwriting and legal costs of an initial public offering in a new shell company and have two years to use the proceeds to buy an acquisition target. To entice IPO investors to park their money in these new SPACs as the sponsors hunted for a deal, the units of the IPO, which are usually priced at $10 each, included one share of common stock plus warrants to buy more shares at $11.50. Sometimes unit holders would also receive free stock in the form of “rights” convertible into common stock. If a deal wasn’t identified within two years, or the IPO investor voted no, holders could redeem their initial investment—but often only 85% of it.
GKN underwrote 13 blank-check deals in the 1990s, but ran into regulatory trouble with the National Association of Securities Dealers, which fined the brokerage $725,000 and forced it to return $1.4 million for overcharging 1,300 investors. GKN closed in 2001, but Nussbaum reemerged in 2003 running EarlyBirdCapital, which remains a big SPAC underwriter today.
SPACs fell out of favor during the dot-com bubble years, when traditional IPO issuance was booming. In the early 2000s, interest in SPACs returned with the bull market, and the deals started getting bigger. Leading up to the 2008 crisis, dealmakers Nelson Peltz and Martin Franklin both turned to SPACs for financing, raising hundreds of millions of dollars each.
Around 2015, SPACs began to offer IPO investors 100% money-back guarantees, with interest; the holder would also be entitled to keep any warrants or special rights, even if they voted against the merger and tendered their shares. Even more significantly, they could vote yes to the merger and still redeem their shares. In effect, this gave sponsors a green light on any merger partner they chose. It also made SPAC IPOs a no-lose proposition, effectively giving buyers a free call option on rising equity prices. As the Fed’s low-rate, easy-money policy propelled the stock market higher for over a decade, it was just a matter of time before SPACs came back into vogue. And so they have, with unprecedented force.
Hedge funders may be the enablers of the SPAC boom, but they certainly aren’t the only ones getting rich. In September, a billionaire-sponsored SPAC called Gores Holdings IV said it would give Pontiac, Michigan–based entrepreneur Mat Ishbia, owner of mortgage lender United Wholesale Mortgage, a $925 million capital infusion, which would value his company at $16 billion. If the deal is completed, Ishbia’s net worth will rise to $11 billion, making him one of the 50 richest people in America. “I never knew what a SPAC was,” Ishbia admits. “I felt like it was a more efficient process.”
There are also the sponsors, underwriters and lawyers who create SPACs, each taking their pound of flesh from the deals. Sponsors, who pay underwriting and legal fees to set up and merge SPACs, normally wind up with a generous shareholder gift known as the “promote”—roughly 20% of the SPAC’s common equity after the IPO.
Alec Gores, the private equity billionaire who helped take United Wholesale public, has listed five SPACs and raised over $2 billion. In the United Wholesale deal, Gores and his partners are entitled to purchase $106 million worth of “founder shares” for $25,000, or $0.002 a share. Gores’ private equity firm hasn’t raised a new fund since 2012. With easy scores like this, why would he?
Among SPAC sponsors, few can match Chamath Palihapitiya’s frenetic pace. Palihapitiya, 44, is a former Facebook executive who founded Silicon Valley venture capital firm Social Capital in 2011. With his venture business slowing down, Palihapitiya has recently turned to the public markets. In the span of 37 months, he has raised $4.3 billion in six New York Stock Exchange–listed SPACs that go by the tickers IPOA, IPOB, IPOC, IPOD, IPOE and IPOF. The founder’s stock he has received for his “promote” will amount to no less than $1 billion, by Forbes estimates. In late 2019, Palihapitiya used one of his SPACs to take Virgin Galactic public. Two other deals have already been announced: mergers with homebuying platform Opendoor at a $5 billion valuation and with medical-insurance company Clover Health at $3.7 billion. Palihapitiya and Gores point out that they intend to invest hundreds of millions via private placements in their deals.
Of the $65 billion raised in SPAC IPOs so far in 2020, Forbes estimates that all told, sponsors like Gores and Palihapitiya should net more than $10 billion in free equity. Great for them, but terrible for the rest of the shareholders. In fact, by the time the average SPAC enters into a merger agreement, warrants afforded to hedge funds, underwriting fees and the generous sponsor’s promote eat up more than 30% of IPO proceeds. According to the study of recent SPACs by Ohlrogge and Klausner, a typical SPAC holds just $6.67 a share in cash of its original $10 IPO price by the time it enters into a merger agreement with its target company.
“The problem with the typical founder-shares arrangement is not just the outsized nature of the compensation or the inherent misalignment of incentives, but also the fact that the massively dilutive nature of founder stock makes it difficult to complete a deal on attractive terms,” says billionaire Bill Ackman.
A handful of billionaires like Ackman are structuring fairer deals with their SPACs. In July, Ackman raised a record $4 billion SPAC called Pershing Square Tontine Holdings. He’s shopping for deals, but his shareholders will face much less dilution because his SPAC has no promote.
“A handful of billionaires are structuring fairer deals with their SPACs. but most SPAC deals don’t come with benevolent billionaires attached. “
Billionaire hedge fund mogul Daniel Och, backer of unicorn startups Coinbase, Github and Stripe via his family office, recently raised $750 million in a SPAC IPO called Ajax I but reduced its promote to 10%. His investing partner in Ajax, Glenn Fuhrman, made billions in profits running Michael Dell’s family office; the SPAC’s board includes an all-star lineup of innovators: Kevin Systrom of Instagram, Anne Wojcicki of 23andMe, Jim McKelvey of Square and Steve Ells of Chipotle. The group has pledged their personal capital into Ajax’s future deal.
“We’re lowering the sponsor economics to make clear that this is not about promoting someone’s capital,” Och says. “It’s about investing our own capital, and then finding a great company that we can hold for a long period of time.”
Most SPAC deals don’t come with benevolent billionaires attached. In fact, if history is any guide, the average post-merger SPAC investor is in for a fleecing not unlike the ones dealt out in the shoddy blind-pool deals peddled by those bucket shops of the 1980s and ’90s.
According to NYU’s Ohlrogge, six months after a deal is announced, median returns for SPACs amount to a loss of 12.3%. A year after the announcement, most SPACs are down 35%. The returns are likely to get worse as the hundreds of SPACs currently searching for viable merger partners become more desperate.
Problems are already surfacing in the great SPAC gold rush of 2020.
Health-care company MultiPlan, one of the most prominent recent deals, may already be in trouble. Acquired by a SPAC called Churchill Capital Corp. III in a $1.3 billion deal, its shares plunged 25% in November after a short seller published a report questioning whether its business was deteriorating more than it let on.
The Churchill SPAC is one of five brought to market by former Citigroup banker Michael Klein, which have raised nearly $5 billion. Klein and his partners now sit on stock holdings worth hundreds of millions, thanks largely to the lucrative promotes. Klein’s investment bank, M. Klein & Co., has made tens of millions of dollars in fees advising his own SPACs on their deals. In the case of MultiPlan, Klein’s bank earned $30 million in fees to advise Churchill to inject SPAC capital into MultiPlan. IPO proceeds, however, are now worth only 70 cents on the dollar.
“Coming out of the financial crisis there was all this talk about the expected outcomes when you have all these traders who have heads-they-win-tails-they-don’t-lose incentives, because it’s somebody else’s money,” says Carson Block, the short seller who called out MultiPlan. “Those incentive structures are alive and well on Wall Street in the form of SPACs.”
Nikola Motor, the SPAC that broke the dam on electric-vehicle speculations, now faces probes from the Department of Justice over whether it misled investors when raising money. Its founder, Trevor Milton, is gone, and a much-hyped partnership with General Motors is in doubt. Shares have traded down 36% from where they stood when the SPAC merger was completed.
Electric vehicles aren’t the only overhyped SPAC sector. So far 11 cannabis SPACs have either announced a deal or are searching for one. And in online gaming, there are no fewer than 10 SPACs in the works.
Blank Checks For Billionaires
SPACs were once shunned by savvy investors. Today they’re beloved by THE WEALTHIEST.
It wasn’t long ago that fracking was all the rage on Wall Street, too, and SPAC IPOs provided quick and easy capital infusions. Energy private equity firm Riverstone Holdings issued three large SPACs—one in March 2016, for $450 million; then two more IPO’d in 2017, raising $1.7 billion—all intent on profiting from shale oil-and-gas investments.
Riverstone’s Silver Run II SPAC acquired Alta Mesa Resources in 2018, but the company quickly went bankrupt, incinerating $3.8 billion of market capitalization on oil fields in Oklahoma. Its other two SPACs completed mergers, and now both are trading below $3 per share.
Despite its dismal track record, Riverstone had no trouble raising $200 million in October for its fourth SPAC IPO, “Decarbonization Plus Acquisition.” Shale fracking is yesterday’s game, so Riverstone has moved on to clean tech.
Hope springs eternal—especially when you can count on hedge fund money to back you up.
Source: Forbes – The Looming SPAC Meltdown
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A Tesla rival is going public at a $5.4 billion valuation via a SPAC set up by Marvel Comics’ ex-CEO
- A Tesla-like British startup is set to go public at a $5.4 billion valuation via a special-acquistion company formed by former Marvel Comics CEO Peter Cuneo.
- London-based Arrival will combine with US firm CIIG Merger. The combined company expects to list on the NASDAQ under the ticker symbol “ARVL.”
- Arrival competes with EV-maker Tesla and the creator of Amazon’s first custom-electric delivery vehicle, Rivian.
- The startup’s signed contracts currently amount to as much as $1.2 billion.
British electric-vehicle startup Arrival will go public by combining with a US “blank check company” set up by Peter Cuneo, the former CEO of Marvel Comics and personal care firm Remington Products.
The deal would value the combined company at $5.4 billion and is expected to raise a total of $660 million, Arrival said in a statement. The electric bus-and-van maker was last valued at $3 billion after receiving a $118 million investment from BlackRock.
Arrival is expected to list on the NASDAQ under the ticker symbol “ARVL” and the deal is expected to close by early 2021. It competes with Elon Musk’s Tesla and Michigan-based Rivian, which is fully backed by Amazon.
It also counts Hyundai Motor Company, Kia Motors, and United Parcel Service among its investors. UPS has already committed to an order of 10,000 electric vans early this year, and may increase that at some point.
Arrival said its signed contracts amount to as much as $1.2 billion and its first vehicles are scheduled for production in the fourth-quarter of 2021.
US businessman Peter Cuneo will join Arrival’s board as non-executive chairman, while founder Denis Sverdlov will remain as the CEO.
Special purpose acquisition companies, or SPACs, are also known as “blank check” companies. These are created specifically to take a company public, going past the traditional route of an initial public offering. Their use has exploded this year. About $66 billion has been raised across 186 SPAC IPOs in 2020 so far, according to SPACInsider.com, more than triple last year’s $13.6 billion in proceeds through 59 deals.
Source: Google SPAC Feed – A Tesla rival is going public at a .4 billion valuation via a SPAC set up by Marvel Comics’ ex-CEO
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Video Interview with MP Materials James Litinsky, Founder & CEO
Interview with James H. Litinsky is the Founder, Chairman & Chief Executive Officer of MP Materials (NYSE: MP) Benzinga’s SPACs Attack.
Daily Show Starts at 11:00 a.m ET.
Where my Main Sidekick, Reporter Chris Katje is the real brains of this show.
SPACs Attack breaks down everything in the SPACs industry. Along with any notable IPOs that are to come out on the market.
Special Guest: James H. Litinsky is the Founder, Chairman & Chief Executive Officer of MP Materials (NYSE: MP)
Mr. Litinsky is the Founder, Chief Executive Officer and Chief Investment Officer of JHL Capital Group LLC, an alternative investment management firm. Before founding JHL in 2006, he was a member of the Drawbridge Special Opportunities Fund at Fortress Investment Group. Prior to Fortress, he was a Director of Finance at Omnicom Group, and he worked as a merchant banker at Allen & Company. Mr. Litinsky received a B.A. in Economics from Yale University, cum laude, and a J.D./M.B.A. from the Northwestern University School of Law and the Kellogg School of Management. He was admitted to the Illinois Bar. Mr. Litinsky also serves as a member of the Boards of the Shirley Ryan AbilityLab and the Museum of Contemporary Art Chicago.
SPACs Attack is all about getting you the information you need so you can go from beginner to expert in the SPAC industry.
Co-Host: Mitch Hoch
Co-Host: Chris Katje
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Liberty Media-backed SPAC aims to raise $500 mln in U.S. IPO
Several high-profile investors such as Bill Ackman and Michael Klein have raised billions through their SPACs this year.
LMAC expects to list its units on the Nasdaq to trade under the ticker symbol “LMACU”.
Citigroup, Morgan Stanley, Credit Suisse and Goldman Sachs & Co. LLC are acting as joint book-running managers for the proposed offering.
EXCLUSIVE: Finance of America CEO is Doubling Down During Pandemic as Mortgage Market Strength Holds – Video Highlights and Replay
In an exclusive interview, IPO Edge Multimedia Editor Hope King sat down with Finance of America Companies Chief Executive Officer Patti Cook to discuss taking her company public and doubling down on lending during the global pandemic.
The consumer-lending platform is set to go public with a valuation of $1.9 billion by merging with a SPAC called Replay Acquisition Corp. (NYSE: RPLA). Institutional investors will also make a private investment of $250 million in the company.
The volume of new mortgages this year is set to exceed last year’s total by 37%, according to the Mortgage Bankers Association. Homeowners are taking advantage of record-low interest rates and buyers want more space amid the pandemic. Watch highlights in the clip below or click here for the full interview.
“The dynamic is like something I’ve never seen before,” Ms. Cook said. “You’ve got the combination of incredibly low rates, you’ve got a very supportive Fed, they’re buying mortgages, and this has led to a tremendous supply of refis (refinancings).”
Finance of America’s services include traditional mortgages, reverse mortgages, commercial-real-estate loans and fixed-income investing.
Ms. Cook said the company had been considering a traditional IPO, but when influential SPAC sponsors Edmond Safra, Lance West and Chinh Chu came calling with Replay Acquisition, it was a no brainer.
“It was the unique partnership with them that was so appealing,” she said. “We think… one of them will be on the board, but the advice and the opportunity they presented to us was particularly compelling.”
SPACs have raised more than $60 billion in initial public offerings to search for targets, according to data compiled by Bloomberg. Becoming a publicly-traded company will allow the consumer-lending platform to raise additional capital more easily going forward, Ms. Cook said.
“We can grow organically, which we’ve done, and innovate and create new products on our own,” she said. “You also can grow and innovate through acquisitions. So, if we see a company with a particular product or that’s in a particular line of business that we think would be a creative to the platform and continue to support that mantra of cycle-resistant earnings, then yes, we can use the capital to do both.”
The new listings come as the mortgage market has held up surprisingly well in the face of the coronavirus pandemic. Demand for credit has swamped lenders, enabling them to charge relatively high prices. It hasn’t been this profitable to issue a mortgage in at least 20 years, according to data from the Urban Institute, a Washington-based policy and advocacy nonprofit.
The average for a 30-year, fixed loan dropped to 2.78%, the lowest in data going back to 1971, Freddie Mac said this month. It was the 12th record low this year.
The decline in borrowing costs that began in March, as the coronavirus roiled financial markets, shows no signs of stopping. Cheap loans have powered a housing rally that has bolstered the pandemic economy. Purchases have soared and millions of current homeowners have been able to save money by refinancing.
Ms. Cook believes Finance of America’s structure is built to thrive beyond a supportive Fed and the pandemic.
“We’re not just a mortgage company,” Ms. Cook said. “We’re built for the long term, for stability, and to generate cycle-resistant earnings to our three lending segments and our two other businesses that augment them.”
For the full interview replay, please click here.
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