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Episode 6

SPACs - Special Purpose Acquisition Company​

SPACs - Special Purpose Acquisition Company

Rob and Rory speak with markets reporter Amrith Ramkumar of The Wall Street Journal to discuss Specials Purpose Acquisition Companies (SPACs). In this episode, we touch on the SPAC craze that has hit the financial markets in 2020 and continued into 2021. Amrith discusses the history of SPACs from a niche product used by a group of wealthy individuals to it now utilized by most of Wall St. and Silicon Valley. He talks about seasoned investors like Bill Foley and Besty Cohen doing SPACs and how this is an alternative to raising money via a VC or Traditional IPO. He provides examples of SPACs such as the SE Asian “Super App” GRAB going public in a SPAC merger that values the business at nearly $40 Billion, even though they aren’t profitable. Lastly, Amirth talks about key investment rounds called (PIPE deals). A Private Investment in Public Equity where investors like Blackrock, Fidelity, Franklin Templeton, T Rowe Price put in vast amounts of money to get exposure to these companies of the future, which has helped make SPAC’s a mainstream alternative.And make sure to like and subscribe. Click HERE for Mr. Ramkumar’s Twitter.

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Transcript

Speaker1: [00:00:00] But it’s also true that the same institutions that dominate traditional IPO’s, they get to look at companies like grab and plow a lot of money in early. So the same can be said of like we work. So I think BlackRock and Fidelity are pipe investors on that deal. Chamath Paul Hoppity is an avid Spatt Kreator. He’s also an avid pipe investor, so.

Speaker2: [00:00:24] Welcome to AFO Wealth Management Forward, a podcast about finance, accounting, technology and entrepreneurship. We apply our decade’s worth of experience and insight into what makes businesses work so we can help others grow both personally and professionally in this ever evolving marketplace. We help accounting firms and financial advisors grow their practice through the adoption of holistic wealth management services, learn from industry leaders in subject matter experts to unlock the secrets of their success. A podcast that shows people in companies the transformative power of technology so they don’t fear it, but instead harness it. Don’t fight the robots team up with them. And here are your hosts, Rory Henry, director of business development and CEO Rob Santos of Arrowroot Family Office.

Speaker3: [00:01:08] Welcome to AFOL Wealth Management Board. Today, we’ll be discussing specced, special purpose acquisition companies or blank check companies. Many analysts, as you know, Rob, are calling twenty twenty one the year of the SPAC. And we’re the pleasure being joined by Amarice Ram Kumar, a markets reporter for The Wall Street Journal, where he covers stocks and commodities. Amarth, how are you doing today?

Speaker1: [00:01:31] I’m great. Thank you, guys, for having me on.

Speaker3: [00:01:34] Thanks for joining us, Rob.

Speaker4: [00:01:35] Absolutely. So we’re we’re huge fans, we love all the work you do. We read it all the time. But, you know, just as just quickly for all of our listeners, could you just maybe spend a second and just talk about what a spak is?

Speaker1: [00:01:52] Yeah, definitely, that’s a great place to start. All of these conversations, so icepack should be thought of as an alternative to a traditional IPO. So it’s a shell company that’s basically a pile of cash that lists on a stock exchange. And the only purpose of that company is to merge with a private company and take that company public. So it’s basically a more expensive way to go public so private companies can give away more equity, but it’s much faster. They can invest and they can attract very excited investors, as we’ve seen across asset classes recently.

Speaker4: [00:02:26] Absolutely. And, you know, we’re located here in Los Angeles and Alec GORs as well. And it has been known as this kind of Spaak King who did a tremendous amount of these people spend a second kind of talk about the history of who’s traditionally use backs and how that’s kind of evolved into today.

Speaker1: [00:02:50] Yeah, it’s really funny, the Spaak, actually, it goes back almost 30 years, so it’s been around for a quite a long time. And even before the first SPAC was created in the early 1990s, basically the predecessors were these blind pools that were tied to penny stock fraud and other bad things in the 1980s. So its banks have really had this kind of reputational taint that they’ve been fighting and really it’s in the past few years that they’ve overcome that. And you mentioned Alec, or as we’ve seen a lot of people in the past five years, but even here to help popularize the product. And so now any wealthy financier, private equity executive, private equity firms or venture capitalists, all of them are doing Spatz because they make a lot of money and a lot of people are trying to say they democratize finance. And that’s really up for debate. There are a lot of incentive structures that really enrich the people who create the spark that insider investors, maybe more than individuals and later investors. But it’s interesting, a lot of day traders I talked to and individuals across the world, they like it. They like the idea that they can get in early with hot companies of the future. But to answer your question yet more directly, it was a small group of wealthy individuals who had duse backs for several decades in a very niche product, basically. And now we’re seeing everybody on Wall Street, Silicon Valley, again, even celebrities are getting on on spects. Everyone wants a piece of the action. So it’s fascinating. And to put it in context, like this year, we have raised a hundred billion dollars. Last year, they raised something like eighty four billion dollars. Last year, total was greater than the entire sum of all past years in the history of the stock market. So just the past year or so, we’ve been living in this crazy world. So it definitely seems like the product and the process, the alternative to a traditional IPO will be here for for a longer period of time.

Speaker3: [00:04:44] And how do Spex target companies to acquire Amherst’s now? What what’s that process look like?

Speaker1: [00:04:52] It really depends, but yeah, basically, like the most well known SPAC sponsor, as you mentioned, Al Gore is like venture capitalist or my pal Hoppity dolefully BET Diko. And there are these there’s this top group, upper echelon of sponsors that have done several of these in the past few years. And so, yeah, basically the Shell company is run by them, and investors putting money in are basically saying, look, we trust that you’re going to do an attractive deal that will make us money over time. And if they don’t like the deal, investors are protected by the right to withdraw their money before the deal goes through. So that’s a really important point. So that’s how these big name people are in some cases got very big name. People are able to raise money for this back, and then it’s basically about courting private companies. So one way to look at it is basically if there’s a menu, it’s like raise money through VXI, private equity, raise money through a traditional IPO and now raise money through a spec. So private companies and their bankers are basically going through these options. And in the past few years, in the past year, really, we’ve seen sparks explode and become a very mainstream mainstream option for a lot more companies.

Speaker1: [00:06:00] So the calls can work both ways from what I’ve gathered. But a lot of times it is these sponsors calling up private companies and saying, hey, we think we can add value X, Y and Z. Our structure might be a little different. We might not take as much equity. And in the case of someone like, again, Bill Fole, Betsy Cohen, these are very seasoned business executives. They’ve been around for a while. They have a lot of connections on Wall Street. They have a lot of expertise in areas like finance. So we’ve seen like fintech and a lot of things like that get done recently. So that’s kind of the pitch. And then we’ve also seen SPAC competition basically heat up. And that’s a force that I think is often underrated in inflating startup valuations now. So if you think about it, when you have four hundred and thirty specs out there, trades in private companies, many of them are chasing the same one. So if you’re being courted by all of them, you can definitely see how that pushes up the overall deal size.

Speaker4: [00:06:56] And, you know, how do you see that shifting the private landscape is obviously on the private side, tremendous amounts of capital being raised by those private funds. Do you see that kind of this, you know, dislocating any of that, those private market processes, aside from just kind of valuation?

Speaker1: [00:07:18] I look at it more of as more of an acceleration than anything, so I think a lot of startups and private companies are now maybe going public more quickly and considering in a way that they weren’t. So but I still think like venture capital and private equity have been so dominant for so long, this will not be like an overnight transition. But we are seeing a lot of companies make those, so to speak, exit. So I think we’re seeing a shift now where public is the new private, so to speak. And that’s something I’ve written about a decent amount where even if you’ve been owned, if you’re a family owned company or a snack company, it’s brands which went public, the respect last year. Now, all of a sudden, it’s cool to go public and that boosts your brand. There are a lot of these intrinsic benefits. So if that shift continues, I think there could be more disruption to private markets. But we’re just seeing so much money kind of splashing around in all of these markets, whether it’s private or spects or whatever. So it is interesting now, though, that going public is cool again in the number of public companies. It’s finally increasing after it fell for about 20 years. So it’s definitely an interesting moment we’re living in.

Speaker4: [00:08:29] And, you know, obviously, with the amount of attention that’s going into this space, I mean, it’s just incredible. Like you were mentioning, you know, people would talk to us about specs and it was these limited large family offices, and sometimes they wouldn’t get a deal. But, you know, with all of this attention and all this capital that’s flowing into this space, you know, could you maybe just touch on some regulatory concerns and how, you know, obviously it’s getting the attention of politicians and regulators. And you know, how you see that maybe kind of affecting the future here.

Speaker1: [00:09:06] Sure, yeah, it’s super interesting because like I mentioned, I think so many people in finance, when they hear facts, they just they kind of have this idea that things. Yeah. It’s like something sketchy might be going on here. And it’s interesting, again, like if you actually take time to understand the product and how it works. There are a lot of investor protections built in and there are some areas where. Sure, like individual investors and later, investors can get burned just as they can through a traditional IPO or other kind of risky speculative investments. But, yeah, the regulators are looking hard at this. I mean, any time you have something like 100 billion dollars plus of money going into a product in just a few months, that’s driving the attention from everyone. And there are a few things specifically that concern regulators. So on the big one is that you’re able to make projections, forward looking projections in a SPAC merger that you can’t in a traditional IPO, because you’re basically merging with an existing Shalal public company. So it’s kind of this regulatory loophole where you can make a splashy presentation at the time of your deal announcement saying we’re going to grow our revenue faster than Google, even though that might not be true. And we’ve seen that hype machine really rev up, frankly, in a lot of instances.

Speaker1: [00:10:23] And a lot of companies, especially those tied to Eve’s promise this really splashy revenue growth and attract investors that way. So regulators have said they’re looking at disclosures about that and kind of disclaimers. It’s important to note that that process typically occurs again at the time of the deal announcement before the deal goes through. And the companies do have to file a lot of documents with historical financial information and give investors a complete picture of the company. So that’s an important point. A lot of this comes down to timing and what gets circulated on YouTube and Twitter and social media that individual investors are actually looking at. So those disclosures are a big issue. Another is about the sponsor, Wpromote, which is the structure that lets back creators by 20 percent of the company for around two hundred and fifty thousand dollars, or a deep discount in most cases. And so there’s not a ton of clarity on how those fares and warrants. So it’s basically structured that those creators get stock and warrants that allow them to buy more in the future. So how that gets shared among sponsor teams, I mentioned some of the most prolific Spaak sponsors like Dramat Property, Michael CLion Dolefully, Betsy Cohen, that group.

Speaker1: [00:11:34] So there’s not a ton of clarity on what they do with those investments or how they might be sharing them with their team. So that’s another area. And most recently, we’ve seen a lot of focus on how warrants are accounted for on SPAC balance sheets, which is pretty funny because that’s pretty much only a paperwork issue where it’s basically Spex having to maybe restate their financial statements and change warrants from an asset to a liability or vice versa, depending on the situation. So that one is, I think, viewed mostly as a temporary issue. But there are these larger regulatory concerns that are impacting investor sentiment right now, too. So all of those reasons are kind of contributing to at least a short term pullback for shares of Spex in the near term. Another key point that I think some people missed is that what this pullback we’re seeing is like it’s just a return to earth and a lot of ways like the fact that every single spark was rising when it listed on an exchange. Again, this is a shell company. If the pile of cash. So the fact that its shares were rising without any information on what company was taking public was a bit a bit crazy there for a few months.

Speaker3: [00:12:44] Yeah, everything’s cyclical, too, you know, mean this is hot right now. When do you see this baby tapering off? And what could cause that that taper?

Speaker1: [00:12:54] Yeah, I think that’s a really interesting question, and the way I look at it is kind of in two parts. So there’s this back as an investment and the spaak as a process, again, alternative to a traditional IPO. So I think this back as an investment is already at least temporarily cooling off a bit like we’ve seen SPAC issuance basically grind to a halt because of these S.E.C. questions. Some of them are more, again, logistical than anything, but we’ll see how long that lasts. And there are these bigger picture concerns. So I think as an investment for everyday people and a lot of a wide range of institutions, people are kind of reassessing that. And I think that will ebb and flow a lot more as far as a process and an alternative, again, to a traditional IPO. I think it might be here for a while, at least for a lot of fast growing companies like we’ve even seen in the past few weeks. Grab the Southeast Asian app operator. It’s going public in a SPAC merger worth 40 billion dollars. So we’re seeing these like really high growth companies, well-known ones. The biggest ones that will be going public in the next few years, like the IPO is again, a mainstream option on the menu for bankers across sectors, especially. Obviously, a lot of this is tech focused. But I think as far as that conversation goes, like it’s back process will be around and I think it will evolve again. So the Wpromote structure, where they get 20 percent for almost no money, then a lot of cases, look, I think that is changing to have longer lockup periods and things like that. So I think that will be around for a while. I’m not sure, again, on the investment question, that’s a hotly debated topic right now.

Speaker4: [00:14:30] Yeah, and you know, what we’ve been seeing a lot is a lot of institutional interest obviously in this. There was a tremendous amount of interest in kind of co investments with these private equity companies and venture capital companies. And so we’re seeing a lot of institutional investors that are seeing this as a way to be able to do that in a in a public listed capacity. Are you seeing a lot of, you know, broader institutional interest in this as well? Aside from the private funds, are large family offices kind of more pension funds and and other traditional large institutional investors?

Speaker1: [00:15:10] Absolutely, and I think that is one of the main arguments for even Speck’s as an investment class being around for a while, we’ve seen just the number of investors at every single stage of the process explode. So in the past, there was a small group of hedge funds called the SPAC Mafia that would put money into Spex, and they would traditionally either withdraw their investment again before a deal goes through and basically play the arbitrage and get their initial money, plus a little bit of interest back, or they would sell if the shares happened to rise when a deal was announced. And so you would have a huge number of redemptions basically before a deal goes through them that would limit deal sizes and pose a lot of challenges to making Speck’s mainstream. But now we’re seeing more and more hedge funds put money in and even more of them are staying invested after a deal goes through. You mentioned institutions like pension funds, sovereign wealth funds. They’re putting money in at the beginning. They’re putting money in in the middle. So there’s a key fundraising round called the private investment in public equity or pipe. So that’s a huge, huge round. That’s important to understand what’s happening with Spex. That’s basically where BlackRock, Fidelity, Franklin, Templeton, Tero, all the big asset managers, they get to look at the private company that’s going public in the SPAC merger and decide if they want to put money in.

Speaker1: [00:16:28] And we’re seeing huge, huge amounts of money from those institutions go in, like you’re saying, because people want exposure to these fast growing companies of the future across the investment spectrum. So, yeah, whether it’s at the beginning or through the pipe or even later on in the process and staying invested after the deal closes, we’re seeing just a huge number of investors wanting to take advantage of this. And some of this is also, again, just jumping on the bandwagon. So hedge funds like want to create more of these strategies and want to play the ARB again. So again, that’s where I think people get worried about the speculation, because if you stay invested post merger, that’s again, basically a traditional investment in a newly public company that may or may not make any money and may or may not have misled people when the deal was announced. So it’s super important for everyone to do their homework in those instances. But, yeah, definitely a huge range of investors have fueled this excitement for sure.

Speaker3: [00:17:25] Can you provide examples of those type deals, Amerson, and how much they these institutions were putting into these companies?

Speaker1: [00:17:33] Yeah, it’s not often super clear on the numbers, but I mentioned the Grabbe deal from a few weeks, I think it was a few weeks ago, as an added value, the company at 40 billion dollars. So, yeah, that’s like a who’s who of large institutions like BlackRock, Fidelity, etc. I think Tero, they were all part of that pipe. And so again, they get to look at the private company ahead of time. They get to do their due diligence. And that fundraising round is key to validate the valuation and make Spex this mainstream alternative. So it’s funny, you talked to a lot of people about specs and they’re like, yeah, it’s opening up finance to more people. It’s giving individuals access to these early stage growth companies. And that may be true, but it’s also true that the same institutions that dominate traditional IPOs, they get to look at companies like grab and plow a lot of money in early. So the same can be said of like we work. So I think BlackRock and Fidelity are pipe investors on that deal. Chamath Paul Hoppity is an avid Spaak Kreator. He’s also an avid pipe investor. So India is the largest renewable company.

Speaker1: [00:18:36] Renew Power is going public and in the eight billion dollars back deal. And so pipe investors on that one include BlackRock, Chamath and a few other big names. So again, these big names, back deals are also being led by these huge institutions. So you’re an everyday investor. Yes. You get the chance to maybe get in at the ground floor very early on, but you need to be aware of what price you’re buying into. So another high profile one is Lucent Motorist’s. So that’s a movie company that is supposed to be a rival to Tesla that has not made any cars yet. We saw basically frenzied buy in from day traders and others that pushed shares of this back up to the high 50s and 60s and it iPod at ten dollars. And then the deal was announced and it valued Lucette at a fraction of what the stock was trading at. And then, of course, the stock fell off a cliff and a lot of people lost money. So when these rumors and media reports come out about possible deal talks, people definitely have to have to be careful.

Speaker4: [00:19:35] Absolutely. And that has been wonderful. Really appreciate all of your time and anything we did that we didn’t cover that you think is important for our listeners to know about, other than they should talk to their financial adviser and do a lot of homework before they they look into investing in any of these things.

Speaker1: [00:19:55] Now, I think we covered it. Thank you all for having me.

Speaker3: [00:19:58] All right, well, we’ll put your information in the show notes. Linkedin, Twitter, follow Amarth here in The Wall Street Journal. And we look we look forward to speaking here in the future.

Speaker1: [00:20:11] Yeah. Sounds great. Thanks for having me on. Hope you guys have a good rest of the day.

Speaker4: [00:20:14] You, too. Thanks so much.

Speaker1: [00:20:16] Thanks.

Speaker2: [00:20:17] All opinions expressed by Rob Santos and Rory Henry on this website, podcast interview are solely their opinions and do not reflect the opinions of Arrowroot Family Office LLC or their parent company or affiliates. And they have been previously disseminated on television, radio, Internet or another medium. You should not read any opinion expressed by anyone as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of their opinions. Past performance is not indicative of future results.

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