Hi Everyone 👋,
Happy Sunday Everyone! Welcome to the 1,180 NEW subscribers who have joined this week. If you’re reading this but haven’t subscribed, join our community of +13,654 smart, fun & edgy investors 👇
Wall Street loves finding fee machines.
It rinse, washes & repeats them.
Until it overdoses on its own success.
Don’t get me wrong, I think the original intent is honourable:
DotCom 👉 Take public emerging tech
Subprime Mortgage 👉 Enable homeownership
SPAC 👉 Ease the go-public process
But when overdone, things get weird.
Like eating Krispy Kreme donuts, the first few are delicious…
But by the end of the box you’re having a Pepto Bismol regret moment and cancelling all plans for the evening.
This week, let’s break down SPAC in <5 mins:
SPAC 👉 What are they & Why should you care?
Questions 👉 My Big 5!
Deals 👉 The Great, The Bad & The Coming Soon
Let’s get started!
1. SPAC: What are they & Why should you care?
A SPAC or “Special Purpose Acquistion Corporation” is a vehicle used to acquire a private company making it public without going through the traditional IPO process.
They started in the 1990s but really got booming in the last 12 months.
From 90 deals and $20B to ~460 deals and nearly $200B.
The reason you should care is many of these deals are NOT going to do well despite having big investors and celebrity names attached to them.
It is key that you know what you are buying or what you already own!
So how do SPACs work?
Essentially, it’s like an IPO and an M&A deal with a blindfold on.
First, you raise a bunch of money. Than you go on a 12-24 month hunt to find the perfect private company to merge with (the target). Then you usually do another financing to add more capital to the entire deal.
I am not going to do a long & boring technical explanation of how they work. You can look at this diagram and fall asleep if you want.
Instead, I am going to get to the heart of the issue with these 5 questions.
2. Questions 👉 My Big 5!
1) Why go-public via a SPAC instead of a traditional IPO?
Bankers will tell you it’s cheaper. But from the research I’ve done the cost savings are tiny and irrelevant. Don’t believe me? Check this simple breakdown HERE.
The real reason is that it’s faster and there is far less scrutiny from regulators. Which means more fees faster. And boy have the bankers been busy !
2) Why are Hedge Funds & Institutions investing in SPACs?
Its not because all the deals are amazing. It’s because the risk/reward profile is significantly in their favour.
Low Risk:
First, if a target isn’t found within 24 months investors get their money back (plus interest). Second, if investors don’t like the target they can decline to participate and get their money back.
High Return:
Hedge funds/institutions can significantly increase their returns using leverage.
And why wouldn’t you leverage up if the returns have looked like this:
3) Can retail investors make the same returns as Hedge Funds & Institutions?
Not likely. Because hedge funds and institutions get preferential access to SPAC deals at the initial $10/share price. Retail usually has to buy on the market after the stock has already moved up.
4) Why are celebrities, politicians & influencers launching SPACS?
Because they get free stock. SPAC founders & sponsors typically get issued 20% of the shares of the SPAC. This is their fee for helping raise the capital, find a target & put their brand reputation on the line. But really it’s FREE MONEY because usually they don’t do any work at all.
The Finanacial Times recently illustrated a deal where founders’ capital of $25k turned into +$395MM.
In a nutshell, it’s a fast way for wealthy people to get even wealthier very quickly.
One thing to really watch out for is lockups coming off. This is when founders & sponsors can sell their previously locked up stock. This can really put pressure on a stock. Lockups typically range from 180 days to up to 1 year after the deal announcement.
5) Have SPAC returns been good over the long-run?
There are always exceptions to the rule. But on average, as a group they have not done well over the long-run.
These returns concern me. So does the fact that SPACs are in the midst of a selloff, harsher than the overall market. SPACS were trading at a 20% premium (ahead of deal announcement) but this has declined 65% in the last 2 weeks.
TWO WEEKS AGO: +20% PREMIUM
NOW: 7% PREMIUM
A DOCTOR’S DIAGNOSIS
I wanted to make sure my analysis was correct so I asked my great friend, who was featured in Bloomberg yesterday (so proud of you!), Chartered Finmeme Analyst Dr. Parik Patel:
I also checked in with Harvard to see what those brainiacs had to say:
3. DEALS 👉 The Good, Bad & The Coming Soon
Now, that the SPAC mania has been going on for months, the deal quality is starting to suffer and things are getting a little weird.
Here is the deal timeline degradation:
Innovators launching SPACS 👉 Richard Branson & Bill Gates
Billionaires searching for innovation launching SPACS 👉 Bill Ackman, Bernard Arnault & Chamath Palihapitiya
Celebrities, Politicians & Influencers launching SPACS 👉 Jay Z, Shaquille O’Neal, Martha Stewart & Paul Ryan
C & D-Level investment banks launching SPACS 👉 Enter Crappy Names Here
Let’s look at TWO extreme examples: GREAT & BAD.
GREAT: Draft Kings ($DKNG, $23B)
DraftKings is an American daily fantasy sports contest and sports betting operator. They went public in April 2020 and it was the first SPAC that caught my attention.
Pretty much every investor is up on it regardless of whether they got in at the IPO SPAC or bought shares in the market after.
The reason this stock is doing well is that both the industry (sports betting) and the business itself (leader in the sector) are stellar.
This is a real company with strong and growing revenue in a sector that has important deregulation taking place, which acts as a massive tailwind.
Contrast this with Nikola which is burning cash fast, embroiled in allegations & one of the most ‘memed’ stocks on the internet!
BAD: Nikola ($NKLA, $6B)
If you bought at the height of the hype you could be down more than 70% today. And the selling pressure continues.
It started off with a slick CEO, sexy promotional videos, a skyrocketing $30B valuation, big institutional investors like Fidelity and a landmark deal with GM.
It ended with an SEC investigation, an ousted CEO, a bleeding stock and a pile of unanswered questions like “does Nikola actually have a functioning hydrogen-fuelled truck or do they simply push one down hills for videos?”
My biggest question is why does this guy on YouTube (who almost failed physics) know more about the Nikola red flags than a JP Morgan analyst who still covers the stock?
SPACS COMING SOON (worth watching):
Barstool Sports: Investor Chernin and the CEO of Barstool formed a $250MM SPAC to acquire “consumer-oriented internet businesses like media, sports, gaming and wellness.” Will Barstool spin-out one of its own divisions into this SPAC?
Apex: Custody and clearing company for hot millennial FinTechs like SoFi, Betterment, Goldman Sachs Marcus, Robinhood (previously) & Stash. Fintech is eating the world!
Bill Ackman: Raised a record $4B last year and a deal has not been announced yet. Speculation of a massive tech acquisition!
Elon Musk is doing something SPACtacular. Last week he Tweeted this👇
Other things I have noticed about SPACS:
Flying Vehicles: Many deals in this niche. I think we will all be taking helicopters to the airport soon!
Cannabis: Most SPACs that raised $ to buy Cannabis companies didn’t end up doing it. Except for your boy Jay Z he got his cannabis deal SPAC’d.
Playboy just went public via a SPAC. Could OnlyFans be next?
NFT Hype: I bet someone launches an NFT SPAC soon!
Distressed Commercial Real Estate: I smell a value SPAC any day now!
Grit’s Take
I have a confession to make. I haven’t invested in a single SPAC.
Over the last 15 years, being in Canada I have invested in hundreds of them. Except here they are called CPCs/Shells.
Bottom line is SPACs are just a bigger version this.
Which is why I didn’t initially tune in because I didn’t understand what all the fuss was about.
At this point, I would much rather watch from the sidelines as the SPACs enter a stage I call “let’s get weird”:
Can’t wait until the next crazy Wall Street innovation…
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
P.S Peter Thiel, the co-founder of PayPal, officially announced he is a Bitcoin Bull & Bitcoin ETFs fuel near-record inflows of +$5.2B to Canadian ETF Sector.
What else we Grittin’ On:
Yields. Bond yields rising spoking equity market. Yellen says it’s a signal of recovery, not inflation. I think it’s BOTH!
#WFH. Big tech and #WFH stock sell-off this week. Rotation to ‘re-open’ the economy stocks: energy, industrials and financials!
Retail Record. “Since the market peaked a few weeks ago, retail traders have plowed cash into U.S. stocks at a rate 40% higher than they did in 2020, which was a record year.”
Disclaimer: All material presented in this newsletter is not to be regarded as investment advice, but for general informational purposes only. Day trading does involve risk, so caution must always be utilized. We cannot guarantee profits or freedom from loss. You assume the entire cost and risk of any trading you choose to undertake. You are solely responsible for making your own investment decisions. Owners of this newsletter, its representatives, its principals, its moderators, and its members, are NOT registered as securities broker-dealers or investment advisors either with the U.S. Securities and Exchange Commission or with any securities regulatory authority. We recommend consulting with a registered investment advisor, broker-dealer, and/or financial advisor. If you choose to invest with or without seeking advice from such an advisor or entity, then any consequences resulting from your investments are your sole responsibility. Reading and using this newsletter or using our content on the web/server, you are indicating your consent and agreement to our disclaimer.