SPAC Opportunities
I'm seeing a lot of 30-some year olds with experience having worked at some top PE or HF shops and maybe a top 5 MBA as CEOs of SPACs. It's unclear that they have individual investment track records that can be attributed specifically to them, so my question is, how do these guys land these roles? Are they recruited into them, or do they actually conceive the idea of doing a SPAC themselves and go raise capital? And if it's their own idea, how are they able to raise $200+ million for a shell company just to look for an acquisition - like without an investment track record, how are investors trusting that they will in fact find a good deal?
Great questions. Perhaps retail investors should be asking themselves this as well…
Think about the SPAC product. It's an asymmetric risk-reward profile for an IPO investor.
You purchase shares at IPO which are held in trust. The management can't do anything with it without your approval, and it earns money-market interest during the search period.
You have two votes. One to approve a deal presented by management, and a second on whether your cash held in trust is used in the deal or returned to you with interest. If you vote to receive your cash instead of keeping it in the deal, it's called "redeeming".
If you analyze SPAC activity over the past eight quarters (really when it boomed), you'll see that the ratio of redemptions rose over the back half of that. People weren't leaving their dollars in the deal the same way any more.
The 'SPAC mafia' are by and large a bunch of hedge funds who use SPAC IPOs as a cash management play. It's a free option. You buy at the offering, receive interest, and have a call option on the (low) probability management finds a deal that looks like a winner.
In this light, you can see how it's possible for people with an okay but not amazing profile or track record to successfully execute a small (<$200m) SPAC IPO. It's less about them and more about the fact that the structure eliminates a lot of the risk.
This is why it's such a different trade for a retail investor versus an institution. Buying at deal announcement is an entirely different phenomenon from buying at IPO. If your dollars aren't held in trust, you don't have the same protection.
Here's a longer comment I wrote about a year ago as a kind of primer on the product.
If the 30 year old sponsor raises a $200mm SPAC and subsequently gets 20% of that, does that mean they're automatically worth $40mm? And for what, spending a few grand setting up the SPAC? Not to mention ANY price appreciation. Seems like a cool gig
To raise a SPAC, the sponsor must invest 'risk capital'. This is typically 3-5% of the IPO raise amount. It can be made either in the form of warrants or units (the same units offered in the IPO: a share and a fraction of a warrant).
So a $200m IPO is going to require at very least $6m in cash, perhaps more depending on how large an operating budget the sponsor decides to capitalize the pubco with.
It's common for a sponsor team that is young or inexperienced in relative terms to raise external money for that risk capital exercise. In SPAC language, that is called 'syndicating', and it's nothing other than the SPAC version of a GP investment.
You're right that sponsor economics are 20% of the common equity in exchange for that risk capital investment in the private placement warrants or units. However, it doesn't automatically correlate to net worth. If the SPAC doesn't successfully close on a business combination target, that risk capital is a wasted investment (because it was spent on the offering and administrative expenses as well as the operating budget for the SPAC's search period).
If there is a successful merger, yeah, the sponsors really get paid.
Thank you for this synopsis. But to get back to the question, who starts the chain? So does the 30-some-year old guy at Goldman decide he wants to do a SPAC, goes around to find some credible gray-haired "Chairman" and investors to pitch in the sponsor capital.... or is it usually the senior guys' idea who then say okay, let's recruit a junior guy to run this thing day to day? I guess what I'm asking is the mechanics of how that 30-some-year old ends up in that role.... I'm guessing the answer is some are done the first way and others the second way, so I'm curious which is the more common way...
From my limited SPAC experience (highlighting Limited), I have seen it the second way where a board / company raise the SPAC and then hire someone that can "spend time" on the execution.
Recently saw some 1st/2nd year IB analysts that formed a SPAC and unsurprisingly one was the heir to an oil fortune and the other a rich Peruvian. Also know a former IB analyst that works in a senior position at a SPAC and he also comes from a very wealthy family. I'm guessing the vast majority of these younger people getting into the SPAC game as execs come from wealthy/prominent families and leveraged their background.
Ok, how can I get me one of those (prominent family)?
Marry well
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