You have probably heard a lot about SPAC IPOs in recent weeks, but what are they all about? Well, SPAC stands for special purpose acquisition company. And they are also known as blank-check companies. Essentially, they supply cash to companies, helping them launch an initial public offering through a reverse merger. These SPACs raise a lot of questions.
U.S. stock exchanges continue to welcome SPAC listings, regardless of how little the SPAC IPOs disclose to prospective and actual shareholders. Sure, they share basic financials. But the financials tend to just disclose the price of the IPO shares as well as the amount of capital sought in the listing.
And even post-IPO, many of the SPACs that I have been examining provide very scant details on what’s going on — if they provide any at all beyond required forms. Some of the most prominent SPACs don’t even have websites for shareholders or provide investor relations information.
But the market loves them right now.
A SPAC-tacular Time for SPAC IPOs
According to a group called SPACInsider, year to date 2020 has seen 62 IPOs of SPAC company stocks amounting to $25 billion in capital raised.
That compares to 2019 — which had been a banner year — seeing 59 SPAC IPOs for under $14 billion. What is fueling this fire? It seems to be a combination of individual investor demand and demand by those that serve them, seeking to cash in on the concept of a unicorn.
The structure is pretty simple. A prospective SPAC gathers together a management team and a pledge to use its financial alchemy to turn IPO cash into multiples more through their investments, acquisitions or mergers. And to keep investors in their SPACs, IPOs tend to come with attached warrants, which are really like longer dated options.
The warrants provide investors the means to acquire additional shares at set prices over set amounts of time. They come with all sorts of conditions — including absolute or average share price. The idea is that by attaching warrants, shareholders are likely to stick with their shares for longer. This provides the SPAC management more time to actually do something and creates a stable post-IPO price.
Think of SPAC IPOs like the golden handcuffs used to entice company management to stay with deferred compensation or unvested options. Just like for golden-handcuffs, the SPAC warrants present a problem. Captive investors minimize the incentive a SPAC has to work through its issues.
What Is With the SPAC Mania?
But again, buyers don’t seem to care.
There are ever more folks seeking to cash in on the SPAC mania. There’s a newer exchange-traded fund provider that is planning on launching a SPAC-focused ETF, called the Defiance NextGen SPAC IPO ETF. My belief is that the ETF won’t be based on a basket of SPAC stocks, but rather a basket of companies that have already completed reverse mergers. But those companies will have plenty of business and capital challenges. More on that in a moment.
This follows a very new index of SPACs from IPOX Schuster. The IPOX SPAC Index demonstrates little so far other than the mania is getting further underway.
IPOX SPAC Index
I’d argue that much of the SPAC mania comes from the desire of individual investors to grab IPO-like profits. And this perhaps is evidenced by the stock performance of the Renaissance IPO ETF (NYSEARCA:IPO) from Renaissance Capital.
Renaissance IPO ETF Price
From 2014 through 2019, the IPO ETF trailed the performance of the S&P 500. But as you can see in the chart above, demand for the ETF has been soaring since March. This has resulted in a year-to-date return of 49.6%, compared to that of 4% for the S&P 500.
If you dig into the ETF’s underlying holdings you will find Zoom Video Communications (NASDAQ:ZM), Uber (NYSE:UBER) and Pinduoduo (NASDAQ:PDD) in the top three. Together, they represent more than 26% of the ETF. These and others remain business-challenged stocks with enthusiastic investors.
What Are the Hot Companies Creating Hype?
But SPAC IPOs are gaining more attention right now it seems than companies going the traditional IPO route. One hot company is Nikola (NASDAQ:NKLA), which promises to eventually offer electric or hydrogen-powered trucks. It merged with VectorIQ Acquisition. Then the SPAC changed its name and symbol to reflect Nikola.
Then there is Virgin Galactic (NYSE:SPCE), which promises to offer sight-seeing trips into near orbit around the earth. It did a similar deal with Social Capital Hedosophia.
And DraftKings (NASDAQ:DKNG) did another similar transaction with Diamond Eagle Acquisition Corporation. DraftKings famously offers online sports entertainment, contests and gambling where legal. Participating in the reverse deal of course is my recommended stock — Hercules Capital (NYSE:HTGC).
And another Diamond — DiamondPeak Holdings (NASDAQ:DPHCU) is in the process of doing its reverse merger with Lordstown Motors. For investors, Lordstown should soon trade under RIDE. The startup is trying to repurpose a shuttered General Motors (NYSE:GM) plant in Lordstown, Ohio, to potentially make electric trucks.
SPACs: Why Should You Invest
You see the pattern here. SPACs are scouring for deals in which they can flip their blank-check cash for trendy companies, even if they aren’t actually up and running. And investors can’t wait for the next deal.
I see why this is happening, and not just because of the mania over trendy industries. Major banks like JPMorgan Chase (NYSE:JPM), Goldman Sachs (NYSE:GS) and my old Merrill Lynch inside Bank of America (NYSE:BAC) have lost talent to alt-financials, private equity, hedge funds and other entities. Deal making has fallen behind along with innovation. So, SPACs have been dusted off from long ago and are fired up — and the stock market is making it work for now.
I used to be in banking. I worked on and with several versions of reverse mergers and acquisition companies. I’ve seen car wash company consolidation and personal security devices and even waste hauling and disposal deals as well as several in the resource markets.
SPACs: Why You Shouldn’t Invest
As I mentioned, SPACs aren’t a new thing in the markets. The structure is similar to all sorts of past transactions. But what has changed is the black-box nature of the current SPACs IPOs.
I used to be with Merrill Lynch International Bank, and I remember a marketing campaign for our trust companies around the globe. The slogan was catchy — and I got plenty of swag saying “Trust Us.” Great slogan, but not something that you typically want to hear from your banker or financier.
But when it comes to SPACs, it seems to be the norm and not the outlier.
When I was asked by my boss at InvestorPlace to do a piece on SPACs, I was eager to dig further into the current market. After all, besides my past direct experiences in transactions, I follow a collection of alt-financials that are in the private equity and venture capital space, including Hercules Capital.
Since its IPO, Hercules Capital has returned 300.6%. Another company that I like, Compass Diversified (NYSE:CODI), has returned 290.6% since its IPO. Both have outperformed the S&P 500.
But in looking at several of the prominent SPACs in the current market, I’m finding more trust us and less facts and figures. I can find all of the U.S. Security and Exchange Commission filings, and I read through several of them. I see the offerings– including the warrant terms and the capital receipts — but I don’t really see any business operating plans.
And I have the fortune to have a trusty Bloomberg Terminal which provides all sorts of data and deal background. But for even very touted SPAC IPOs, I am wanting for data.
As I’ve said and written for decades, as a former banker, if I can’t see the way to make a loan to a company, there’s no way that I can buy it — or more importantly, recommend it to readers and subscribers.
Here are some prominent SPACs that might have a deal in the wings for some gizmo company, but there is no information to confirm they shouldn’t be bought:
- CF Finance Acquisition Corporate (NASDAQ:CFFA, NASDAQ:CFFAU)
- Churchill Capital II (NYSE:CCX, NYSE:CCXU)
- Churchill Capital III (NYSE:CCXX, NYSE:CCXXU)
- Pershing Square Tontine Holdings (NYSE:PSTH, NYSE:PSTHU)
SPAC IPOs: CF Finance Acquisition Corporation (CFFA, CFFAU)
CF stands for Cantor Fitzgerald, which is a storied financial firm that lost many of its traders during the attack on the World Trade Center in 2001. It came back — and came back with much success. And I know plenty of its traders and senior management, including some that were comrades on my trading desks of my old banks.
CF Finance Acquisition Corporation Price
CF Finance Acquisition Corporation has a series of SPACs that are working to do something. One major transaction announced this week is taking the asset manager GCM Grosvenor out from under private ownership. The deal is for around $2 billion and will see some sort of listing or reverse listing.
On the surface, this is an interesting transaction as I like asset management companies that can generate fee income in bull and bear markets. But other than the press release and some filings, there’s little information about the run up to the deal. And I wonder, prior to the transaction, is this what its SPAC investors had in mind when they bought the CFFA shares.
Like for other SPACs there is no website, no discussions, just a black box. It is a prime example of a SPAC that a regular investor should avoid.
Churchill Capital II (CCX, CCXU) and Churchill Capital III (CCXX, CCXXU)
Churchill Capital has a series of SPACs that come from the leadership of a long-time Citigroup (NYSE:C) executive. Michael Klein rose through the ranks from 1985-2008 to become the vice chairman of the firm. He then went on to run his own shop and sits on the board of Credit Suisse (NYSE:CS).
Churchill Capital II (White) and Churchill Capital III (Blue) Price
Churchill’s SPACs are working in the darkness of the black boxes. Churchill Capital II recently did a deal in a partial investment in Clarivate (NYSE:CCC). Clarivate is in the data analytic software business. And while it may well be an interesting company, there was very little discussion about the process.
Now, there is a rumor that Topgolf International is in talks to do a reverse merger with Churchill. Topgolf has a series of driving ranges with additional entertainment facilities. Of course, the novel coronavirus has challenged this business. Granted, as golf enthusiasts return, there may well be recovery in the works for Topgolf. But again, is this what investors thought they were sending their cash into?
And Churchill Capital III is doing another deal to take a stake in MultiPlan, which offers health insurance claim management and mitigation services.
They might work out — or not. But with no business plans from either SPAC or a potential Churchill Capital IV, how can an investor know what they might be buying? All Churchill Capital SPACs should be avoided by everyday investors.
Pershing Square Tontine Holdings (PSTH, PSTHU)
Pershing Square Tontine Holdings is one of the largest SPAC IPOs that came to the market last month, pulling in some $4 billion.
Pershing Square is run by its founder, Bill Ackman, who is labeled as an activist investor. This isn’t his first SPAC, as back in 2011 he launched and listed Justice Holdings in London. He then turned around and did a reverse merger with Burger King Worldwide Holdings. Then, with 3G Capital, he did a transaction to combine it with the famed coffee and donut chain Tim Horton’s to become Restaurant Brands International (NYSE:QSR).
I have yet to go through all of the transactions to see how investors in the JUSH SPAC fared, but over the trailing year QSR has lost 23.6% in price alone.
Now Ackman is back with the new SPAC. Again, other than SEC and exchange filings there is little on the company. But he has been giving interviews. He says that the company is “in a unicorn mating dance and we want to marry a very attractive unicorn on the other side.”
Pershing Square Tontine Holdings Price
He has been at least a lot more forward about his approach with the SPAC as it is looking for companies with predictable cash flow and barriers to market entries from competitors. And it wants companies with less risk. Two potential companies on the list are SpaceX and Palantir Technologies.
SpaceX is the antipathy of predicable cash flow and less risk.
But Palantir Technologies is very interesting for me. I’m waiting for the company’s IPO that is already in the works. Palantir is one of the most secretive and unbelievably successful data analytics companies. And I still don’t understand how it could operate on its same high-frequency level as a public company. This makes for a challenge for a SPAC deal, let alone an IPO.
But the key again is that investors in the SPAC are just buying Bill Ackman. They have no other evidence that they aren’t getting a pig-in-a-poke or a unicorn. Avoid the Pershing Square Tontine Holdings SPAC.
Neil George was once an all-star bond trader, but now he works morning and night to steer readers away from traps — and into safe, top-performing income investments. Neil’s new income program is a cash-generating machine … one that can help you collect $208 every day the market’s open. Neil does not have any holdings in the securities mentioned above.