Speaker 1: Hello, and welcome to another episode of the Odd Thoughts podcast.
Speaker 1: I'm Tracy Allaway and I'm Joe Wisenthal. Joe, you've heard
Speaker 1: of SPACs, right, Yeah, I absolutely I've heard of them. Um,
Speaker 1: you know, I've heard about them for a while, so
Speaker 1: called blank check companies, but they've definitely been one of
Speaker 1: the big stories of especially in the last couple of months. Right.
Speaker 1: And for those that don't know, SPAC stands for a
Speaker 1: special purpose acquisition company and they're basically these blank check firms,
Speaker 1: shell companies that set out to buy other companies, uh
Speaker 1: and make money off of them. And it's a way
Speaker 1: for people to get involved with those companies without the
Speaker 1: company's actually having to i p O in the public market. Right.
Speaker 1: And the interesting thing is that the SPAC is public
Speaker 1: right away, so the SPACK does the i p O.
Speaker 1: It trades and so of course there's always a lot
Speaker 1: of you know, there's venture capital, and there's private equity.
Speaker 1: There's always companies that are financial companies that are buying
Speaker 1: other companies. But this is a situation in which the
Speaker 1: buyer the show goes public, it raises money in that offering,
Speaker 1: and then it goes out in search of an actual
Speaker 1: real business to buy, right, so you're sort of pre
Speaker 1: funding acquisitions and you don't know what they are going
Speaker 1: to be exactly. Now, the funny thing about SPACs is like,
Speaker 1: I don't remember that much about them before two I
Speaker 1: don't know why, but apparently that was the last time
Speaker 1: that everyone was talking about spacts, Right, Well, I think
Speaker 1: that's right, And I think that they do historically have
Speaker 1: this reputation because of you know, when you hear like
Speaker 1: blank check company, you hear like blank check that typically
Speaker 1: does that have like historically great connotations and anything, But
Speaker 1: you hear like blank check company, and it's like, wait,
Speaker 1: I'm handing money over to this company and I have
Speaker 1: no idea what they're going to do with it except
Speaker 1: that I hope they're going to make a good acquisition.
Speaker 1: So historically I think they have sort of a questionable reputation,
Speaker 1: although part of our discussion today is is that changing.
Speaker 1: But it also tends to be the case that they're
Speaker 1: associated with periods of you know, boom speculative speculative periods,
Speaker 1: and so you mentioned the pre crisis period, last crisis,
Speaker 1: and of course you mentioned now and you know, historically
Speaker 1: they do seem to be associated with periods of speculative
Speaker 1: appetite show we say, yeah, exactly. I mean the term
Speaker 1: blank check company kind of screens too much money in
Speaker 1: the system, doesn't it um, But you're exactly right. That's
Speaker 1: the big debate. Now. We saw lots of SPACs before
Speaker 1: the two thousand eight financial crisis kind of kicked the
Speaker 1: air out of the market's tires, and now spacts are
Speaker 1: coming ac. I think so far in we've had over
Speaker 1: sixty five deals for something like twenty four billion dollars.
Speaker 1: Everyone is talking about them. There's all types of different structures,
Speaker 1: some are more controversial than others. But the big question
Speaker 1: is is this a sign of some sort of excess
Speaker 1: in the market. Are we actually protecting investors through these structures,
Speaker 1: or is this a way to funnel money to sponsors
Speaker 1: or corporate owners. So today we are going to dig
Speaker 1: into all of those questions. Uh, And I'm really excited
Speaker 1: to say we have Kelly driscoll. She's a board director
Speaker 1: at a spack called Fusion Acquisition Cores. She's also a
Speaker 1: long time executive over at State Street Global Advisers, so
Speaker 1: we're really happy to have her on. Kelly, Welcome to
Speaker 1: all thoughts, Thank you. It's a pleasure to be here
Speaker 1: with you today. So Kelly, maybe just to begin with,
Speaker 1: could we could we maybe discuss why ice bacts are
Speaker 1: experiencing this resurgence now, why now at this moment? Sure,
Speaker 1: I think the big wine now is the volatility in
Speaker 1: the market. So certainly with the coronavirus and here in
Speaker 1: the US the uncertainty around the upcoming elections, there's incredible volatility,
Speaker 1: which tends to be puts a damper on traditional I
Speaker 1: p o s with that much volatility, and so SPACs
Speaker 1: are an alternative to I p o s. It's a
Speaker 1: way for private companies to basically go public by being acquired,
Speaker 1: as Joe had mentioned, by a spect that is already
Speaker 1: publicly traded. And two, go back to some of the
Speaker 1: comments that you made on the evolution. You're absolutely right
Speaker 1: that one of the reasons they you maybe haven't heard
Speaker 1: of them, you know, since the early two thousands, is
Speaker 1: because that's when they got to got to receive the
Speaker 1: lot of mixed reactions and had some mixed reputations in
Speaker 1: the marketplace. But there were some regulatory and listing changes
Speaker 1: in two thousand eleven. The regulations made it easier to
Speaker 1: approve acquisitions because the acquisitions in the end have to
Speaker 1: be approved by the shareholders of this back. And then
Speaker 1: in two thousand seventeen, the New York Stock Exchange revised
Speaker 1: its listing requirements to mirror nasdex requirements. So you saw
Speaker 1: more SPACs listing on the New York Stock Exchange. But
Speaker 1: kind of going to what you said, why why now?
Speaker 1: Why so much? Because the I p O, the traditional
Speaker 1: I p O market has really not closed down, but
Speaker 1: there's been such a damper on it that, uh, companies
Speaker 1: looking to go public or looking for alternative alternative vehicles.
Speaker 1: I want to dig into that. There's so much I
Speaker 1: want to dig into, but let's just start with for
Speaker 1: people unfamiliar with the sort of simple will structural governance
Speaker 1: mechanics of how it works, the fundraising process, why people
Speaker 1: agree to lock up money with a management team, the
Speaker 1: obligation on that management team, and then how that decision
Speaker 1: comes to in terms of selecting a company to essentially buyout,
Speaker 1: just like sort of walk through the basic spack steps. Sure,
Speaker 1: so basically you start with a sponsor who decides that
Speaker 1: they really want to set up a spack and they
Speaker 1: basically get what we call founders shares or what sometimes
Speaker 1: it's referred to as the sponsor promote, so they have
Speaker 1: founder shares in the spack. Those are the first years
Speaker 1: that come in and then they file an S one.
Speaker 1: They go through the steps of having the spack go
Speaker 1: public um with the traditional underwriter. The units are then
Speaker 1: offered in in an underwriting and they typically are offered
Speaker 1: it ten dollars a unit. We can talk about Acman's
Speaker 1: It's back later on, but the typical structures they're offered
Speaker 1: a ten dollars unit. The public has, including retail investors,
Speaker 1: have the ability to buy those public shares, and excuse me.
Speaker 1: Usually the units consist of a share and a fraction
Speaker 1: of a warrant, so and the warrants are typically exercisable
Speaker 1: at above the I p O price, so eleven dollars
Speaker 1: and fifty cents. So that's the structure, if you will.
Speaker 1: The reason somebody might invest is because, uh, as you know,
Speaker 1: in a traditional I p O it's very hard to
Speaker 1: get an allocation in an I p O. So retail
Speaker 1: investors can invest in a spack. The money raised in
Speaker 1: that I p O goes into a trust. So there's
Speaker 1: some downside for investors. The trust holds the cash until
Speaker 1: the spack back with a merger acquisition and puts it
Speaker 1: to the shareholders. That the shareholders don't like the acquisition,
Speaker 1: they can uh, they can say I want my money back,
Speaker 1: They can redeem their shares. Even if they vote for
Speaker 1: the acquisition, they still have the ability to deem their shares,
Speaker 1: so you can. Spact provides some downside up until the
Speaker 1: time of the business combination. And you're right, Joe, that
Speaker 1: that that you're kind of locking your money in for
Speaker 1: a period of time until the SPAC sponsors find find
Speaker 1: the right opportunity and present the acquisition merger to the shareholders.
Speaker 1: You mentioned the initial sort of SPACK investors also get
Speaker 1: a warrant, so a right to buy further shares of
Speaker 1: the company at slightly above the offering price. Is that
Speaker 1: sort of like a compensation for the sort of time
Speaker 1: value of my of locking your money up while the
Speaker 1: board or while the well the additional sponsors could spend
Speaker 1: up to two years looking for a company. Yeah, and
Speaker 1: that I think, as as you say, it gives um investors,
Speaker 1: you know, more potential upside if the business that they
Speaker 1: have acquired does well over the over the long run,
Speaker 1: so they get a little more upside. So you mentioned
Speaker 1: why investors might be interested in the structure. It gives
Speaker 1: them companies that might be otherwise very difficult for them
Speaker 1: to have access to, especially in an I p O
Speaker 1: process where you know, the initial allotments are going to
Speaker 1: go to very big investors like you know, mutual funds
Speaker 1: UM And you mentioned the role of the sponsors, and
Speaker 1: you know, sponsors get these sponsors shares and most of
Speaker 1: them seem to be well compensated for their role in
Speaker 1: these companies. But what's in it? What's in it for
Speaker 1: a company that is being bought by a spack or
Speaker 1: a company that is reverse merging into a spack, why
Speaker 1: do they do it instead of doing an I p
Speaker 1: O for instance. Well, that's a good question really for
Speaker 1: the target business and its owners. One if you look
Speaker 1: at today's market, it's the ability to go public during
Speaker 1: periods of market instability, so you have access to public capital.
Speaker 1: You can raise money to fund growth or raise money
Speaker 1: to fund your operations, and you can do it with
Speaker 1: much more certainty. So SPACs, once the spack identifies the
Speaker 1: target and starts having negotiations with the target, it's a
Speaker 1: negotiated deal. So the target business the business owners have
Speaker 1: much more say in the str ructure of of the
Speaker 1: company going forward, how much of their equity investment are
Speaker 1: they willing to roll into the company, what's the price
Speaker 1: so you know they usually in a traditional I p
Speaker 1: O there's really no no ability to negotiate price. So
Speaker 1: it's all a bit of a negotiation with a SPAC,
Speaker 1: which can be very comforting to a company that's going
Speaker 1: to go public, and the other sort of big benefit
Speaker 1: for the target businesses. You can include financial projections which
Speaker 1: you can't do in a traditional I p O. So
Speaker 1: in the proxy statement that goes to the SPAC shareholders
Speaker 1: to vote on the deal, whether they want to prove
Speaker 1: the deal, whether they want to get their money back. Uh,
Speaker 1: that can include financial projections and forward looking statements, which
Speaker 1: is not allowed in a traditional I PO. So when
Speaker 1: you look at some of the sort of larger if
Speaker 1: you look at some virgin lactic or draftings, it gave
Speaker 1: them the ability to show what the company is going
Speaker 1: to look like or might look like over sort of
Speaker 1: multi year projections. Right. So this is where I have
Speaker 1: to like ask like a sort of like cynical question
Speaker 1: because you say that you know, this is a volatile market,
Speaker 1: and so SPACs offer another route to go in public.
Speaker 1: But on the other hand, this is one some people
Speaker 1: might say this is a volatile market. But another way
Speaker 1: to say that is that this is a sort of
Speaker 1: euphoric market and that if you're a company that was
Speaker 1: in enterprise software or cloud software or autonomous vehicle tech,
Speaker 1: there's extraordinary demand in this market um for equity issuance.
Speaker 1: And so is it really about, Okay, this is a
Speaker 1: path to the market in a market that maybe doesn't
Speaker 1: have the appetite, or is it about there's a bunch
Speaker 1: of people that are pouring money into speculative. That's a
Speaker 1: lot of retail money in this market. I mean, that's
Speaker 1: been one of the extraordinary stories of and if you like,
Speaker 1: I want to like sort of tap some of that
Speaker 1: retail money, and you want to be able to give
Speaker 1: projections which you can't do in an s one UM
Speaker 1: and say here's our hockey stick growth about you know,
Speaker 1: our total addressable market for autonomous vehicle tech going out
Speaker 1: to the year that this is sort of an easy
Speaker 1: way to get um less sophisticated money. I actually think
Speaker 1: it is a little bit of both. So I do
Speaker 1: think when you look at the spack market right now.
Speaker 1: I know Tracy mentioned the numbers which day to day
Speaker 1: are are changing because there's so many specs. So I
Speaker 1: think the numbers are now you know, over thirty billion
Speaker 1: of capital raised by specs over seventy I p o
Speaker 1: s by SPACs. That compares to thirteen point six billion
Speaker 1: raised by fifty nine packs in ten And the average
Speaker 1: size of SPACs has grown just since last year. So
Speaker 1: I would say if you look at the numbers, particularly
Speaker 1: in July and August, uh, it's not just a hot
Speaker 1: market but arguably somewhat overheated. So there's been such a
Speaker 1: flood of new SPACs on the market. And as you say,
Speaker 1: looking for a lot, looking for technology place. So what
Speaker 1: where is there going to be substantial growth? Uh? In
Speaker 1: a private company that we can bring to the public market.
Speaker 1: And and yes, the the investors in this back are
Speaker 1: really betting on this SPAC management team, this back board
Speaker 1: and management team to bring a high quality and in
Speaker 1: most cases they're looking for a high growth company that
Speaker 1: they can bring to market. Um to Joe's point, can
Speaker 1: you talk a little bit more about the differences in
Speaker 1: pricing or valuing companies in a SPACK structure versus a
Speaker 1: traditional I p O process. So when I think of
Speaker 1: an I p O, there's sort of this whole ecosystem
Speaker 1: of people, you know, the underwriters, the potential investors. There's
Speaker 1: consensus building around the valuation. As you mentioned, no one
Speaker 1: really knows what it's going to be until it lists
Speaker 1: and then it starts trading, and usually people are expecting
Speaker 1: that first day pop and the criticism of that is
Speaker 1: that it means that the company itself has left money
Speaker 1: on the table. But the SPACK process is much more
Speaker 1: certain again, as you pointed out, like you know what
Speaker 1: the valuation is, but it's also much more confined. Um So,
Speaker 1: I guess what I'm asking is is this stack structure
Speaker 1: a way to for for companies to raise more money
Speaker 1: than they would in the I p O process. Yes,
Speaker 1: I think there's more opportunity to avoid that significant potential
Speaker 1: underpricing than a traditional I p O, where where the
Speaker 1: under writers and the larger investors are pricing in that
Speaker 1: ability to pop. I think in the average in the
Speaker 1: traditional I PO was like below market, and they are that.
Speaker 1: I mean that's the way traditional I PO is set
Speaker 1: up to see that big pop. Whereas here, I think,
Speaker 1: particularly with the significant number of SPACs in the market
Speaker 1: right now looking for targets, the targets are in a
Speaker 1: better position to negotiate favorable terms and negotiate that price
Speaker 1: so that they can maximize the amount of capital that
Speaker 1: they can raise. And that I think is what we're
Speaker 1: starting to see now in the spack market. I mean,
Speaker 1: there's still thousands of targets, so there are lots of
Speaker 1: companies out there, but they're definitely in a better position
Speaker 1: to negotiate. I record somewhere that some of them are
Speaker 1: even having these big calls back offs they bring several
Speaker 1: SPACs in and that's sort of a you know, a
Speaker 1: beauty contest if you will, Actually, can you clarify that?
Speaker 1: So the private company chooses between specs, you know what
Speaker 1: you're saying, No, I mean the SPAC goes out and
Speaker 1: looks for for for a target. You're right, But what
Speaker 1: I'm saying is what I've heard is I mean there's
Speaker 1: so when you think about it, with all of the
Speaker 1: SPACs right now looking for targets, you have to imagine
Speaker 1: some of the high tech and you know, high growth
Speaker 1: companies who might have gone through more mature financings and
Speaker 1: are just about ready to, you know, thinking about going public,
Speaker 1: and maybe you're thinking about aspact as as an alternative.
Speaker 1: If they're getting calls from several SPACs, uh, they might
Speaker 1: have the ability to say which one do they think
Speaker 1: they want to go with and which one did they
Speaker 1: think they can either get the best terms with or
Speaker 1: will be a really solid partner. So this actually leads
Speaker 1: into something I was wondering. So, you know, if a
Speaker 1: company is getting lots of different approaches from lots of
Speaker 1: different SPACs, are are all SPACs created equal? Or how
Speaker 1: would they be choosing um which SPACK to partner with?
Speaker 1: And I guess what I'm getting at. Is our SPACs
Speaker 1: a sort of neutral vehicle to take companies public or
Speaker 1: are they more about a business partnership with a sponsor?
Speaker 1: That's an excellent question. I think they really are more
Speaker 1: about a business partnership. So what does this back team
Speaker 1: bring to them? So when I look at this back
Speaker 1: huge an acquisition, our focus is predominantly the fintech and
Speaker 1: asset wealth management area, and one of the reasons is
Speaker 1: the SPAC team that we have that we put together
Speaker 1: are all from that background. So we have financial experience,
Speaker 1: we have investment experience, we have uh E, t F experience,
Speaker 1: fintech experience. So so our focus and our expertise is
Speaker 1: really in that space. And that's what we think we
Speaker 1: as a fact team effusion acquisition bring to a potential target.
Speaker 1: Is some of that uh in, some some main recognition,
Speaker 1: some significant experience, some you know, perhaps more seasoned experience
Speaker 1: in developing strategy and some new products. So that might
Speaker 1: be attractive to up target to have some of that
Speaker 1: seasoned experience come in. And and whether that's in the
Speaker 1: form of being on the board or an advisor, helping
Speaker 1: them with their strategy, really exploring their growth story, how
Speaker 1: do you get paid so ultimately UM you know in theory.
Speaker 1: You know Bill Gurley, the venture capitalist, he's been very
Speaker 1: critical of the traditional I P O process for quite
Speaker 1: some times, and he says, like SPACs are clearly better.
Speaker 1: The company doesn't give up that big pop two investors.
Speaker 1: This is like a real good avenue. And so my
Speaker 1: question is, Okay, let's say I'm buying into your um
Speaker 1: spack as an investor, and I'm trusting that you're going
Speaker 1: to make a good acquisition, a good use of my
Speaker 1: money what ultimately determines you and your other partners who
Speaker 1: are involved in this back in terms of how much
Speaker 1: UM you make. So the traditional spack when I mentioned
Speaker 1: earlier founders shares, the traditional spac basically the founder shares
Speaker 1: are purchased for a nominal amount and those founder shares
Speaker 1: usually equate to about but with warrants equate to about
Speaker 1: of the company being acquired to post the business combination.
Speaker 1: So there's significant opportunity for this fact sponsors and the
Speaker 1: directors and the management to make money of a company,
Speaker 1: especially potential growth company in in you know when I
Speaker 1: say short short term maybe you know in the sixth
Speaker 1: one year term um and in the longer term as well.
Speaker 1: So particularly with warrants, is there a minimum lock up?
Speaker 1: So like, for example, I'm looking at the chart of
Speaker 1: Nicolodge that's very sort of infamous or popular electric truck maker.
Speaker 1: They had a thirty six thousand UM dollars in total
Speaker 1: revenue last quarter market cap of about fourteen billions. So
Speaker 1: there's another debate somewhere else about that valuation. But that's
Speaker 1: not the point. My question is whoever did that spack?
Speaker 1: Whoever found that company and brought them public? Are they
Speaker 1: in a position most likely to instantly be able to
Speaker 1: cash in or do they have to? Are they locked
Speaker 1: up for a while such that ultimately, if this just
Speaker 1: turns out to be a temporary pop and the company
Speaker 1: does not turn into the next Tesla, uh, they don't
Speaker 1: get paid. Yeah, they're there, typical and it's all sort
Speaker 1: of negotiated in the structure. In in in the original structure,
Speaker 1: but there are typical lock ups, and some of the
Speaker 1: terms are changing. When I mentioned of a company, when
Speaker 1: you look at uh Akman's Pershing square Ton team, which
Speaker 1: was the biggest It's back I p O so far
Speaker 1: he raised, Um, I think I mean four billions? Did
Speaker 1: I say forty? I'm sorry, yeah, I was like, whoa,
Speaker 1: I was completely off four billion. No, No, that would
Speaker 1: be hard when only thirty billion has been raised in total.
Speaker 1: But it's four billion. Um. What's fascinating about what he
Speaker 1: did in his It's Back is he did not put
Speaker 1: in founder shares. That this is what I understand. So
Speaker 1: instead of founder shares, the sponsors and directors purchased warrants
Speaker 1: and they're exercisable. I believe it's that three years after
Speaker 1: the business combination, for about six percent of the equity
Speaker 1: of the combined business. And I think that exercise prices
Speaker 1: at about above the I p O price. So, as
Speaker 1: I mentioned, you know, the traditional structure was of equity
Speaker 1: with with the warrants, and now we're seeing, you know,
Speaker 1: changes to that structure, and I think we'll continue to
Speaker 1: see changes to the structure, particularly if the number of
Speaker 1: back I p o s continues to grow. Uh and
Speaker 1: the universe of targets, you know, was looking for a
Speaker 1: spack that maybe wants to be in you know, in
Speaker 1: it for the long run or um you know, take
Speaker 1: less less of the equity off the table. So the
Speaker 1: criticism some of the sponsor shares was that the sponsors
Speaker 1: kind of get them up front, and because they immediately
Speaker 1: get of this company, they they have a reduced incentive
Speaker 1: I guess to go out and spend a lot of
Speaker 1: time finding a quality business like they've already been paid.
Speaker 1: So Akman's innovation is that you get rid of the
Speaker 1: founder shares, you keep the incentives aligned with the investors.
Speaker 1: Is that right? I think that's right. I mean, I
Speaker 1: hear that criticism, but when I think about our spec
Speaker 1: this is we are rookies in this back market our team,
Speaker 1: and we have solid reputations. As I said, we're you know,
Speaker 1: all decent executives, and so for us, it's about our
Speaker 1: reputation as much as it is you know, to to
Speaker 1: see if we can um benefit from this in the
Speaker 1: long run financially. So we want to we want to
Speaker 1: get a really good spack deal. We want to want
Speaker 1: to do a good deal. And I don't think most
Speaker 1: SPACs are out to find, you know, sort of a
Speaker 1: paltry jill just to try and make money in the
Speaker 1: short term. I could be wrong about that. I mean,
Speaker 1: there are so many out there, but when I look
Speaker 1: at it, I think, well, it's really important for us
Speaker 1: to get a quality deal. So there's been a lot
Speaker 1: of spacts obviously. And what's interesting is that in addition
Speaker 1: to sort of season, dealmakers and financial types were also
Speaker 1: seeing the rise of sort of PLAUSI celebrity SPACs. Billy Bean,
Speaker 1: who was profiled in Moneyball, is doing a SPAC. Former
Speaker 1: Speaker of the House Paul Ryan is doing a back um.
Speaker 1: When you go out and you are trying to raise money,
Speaker 1: what's the pitch? What is the why should uh? What?
Speaker 1: You know? This sort of typical you know, if you're
Speaker 1: not acman, if you're not a household name, how do
Speaker 1: you pitch yourselves and say, you know, give your ten
Speaker 1: dollars a share to us? As opposed to the hundreds
Speaker 1: of other facts available out there for Fusion acquisition, we
Speaker 1: really look at our team. We think we have a
Speaker 1: strong team. We have experienced management. Our management board team
Speaker 1: has as they mentioned, financial services, fintech, asset management. We
Speaker 1: have m and a experience, product, innovation, operational expertise. So
Speaker 1: we think we can be a good partner to a
Speaker 1: potential target. So and I think that comes out we
Speaker 1: we are obviously in the in the process now looking
Speaker 1: for a target, and so we've been talking to the
Speaker 1: several companies. I think that comes out in the dialogue
Speaker 1: that we have with the companies. It's sort of like
Speaker 1: a dance, you know, uh, is this going to be
Speaker 1: a good fit for both sides or do we think
Speaker 1: we're finding a quality team with a proven business model
Speaker 1: And we're looking, you know, obviously for a very strong
Speaker 1: existing company. We you know, we want a strong team
Speaker 1: that that has um the ability to grow, but has
Speaker 1: proven some of their their you know, their business model
Speaker 1: and strategy. So we think we bring perhaps some seasoned
Speaker 1: experience and expertise to that management team, and that comes
Speaker 1: out in the dialogues and the due diligence we do
Speaker 1: and the questions that we ask. And I think that's
Speaker 1: where you hopefully will be successful in that dance. Now
Speaker 1: when you when you look at some of the more
Speaker 1: well known SPAC sponsors, um you see in the past
Speaker 1: there have been several huge sponsors with big home runs.
Speaker 1: But you know, not with with the amount of SPACs
Speaker 1: that are out in the market right now, not everyone's
Speaker 1: going to be at home one. And I think in
Speaker 1: the end, UH investors might benefit from singles and doubles.
Speaker 1: And that's where maybe you ask Billy being about you know,
Speaker 1: in this entire conversation, I keep thinking, I keep thinking
Speaker 1: back to venture capital. So you know, we're talking a
Speaker 1: lot about the importance of the quality of the sponsors
Speaker 1: of the management team, what the sponsors can bring to
Speaker 1: the table for both investors and the company itself. And
Speaker 1: to me, it sounds a lot like the venture capital model,
Speaker 1: you know, where the venture capitalists kind of go out
Speaker 1: to Silicon Valley and they have these lengthy conversations about
Speaker 1: making investments in these up and coming tech firms, and
Speaker 1: they're all sort of fighting for the same targets. Why
Speaker 1: why start us back as opposed to just set up
Speaker 1: a venture capital firm and invest that way. I guess
Speaker 1: back is really more of a late stage venture cap financing,
Speaker 1: so so you know, you're not getting in at the
Speaker 1: earliest stages, but you're getting in when the company might
Speaker 1: be ready to go public. And that's what you're really
Speaker 1: looking for is somebody who's sort of at the late
Speaker 1: stage venture venture financing, who who need who's looking for
Speaker 1: the benefits of going public and having access to liquidity
Speaker 1: and and and public capital, And so that's really it's
Speaker 1: you know, kind of replacing, if you will, or or
Speaker 1: competing with late stage venture financing, but in a way
Speaker 1: to go public that's a little different from a traditional
Speaker 1: I P O H. I guess that I'm still like
Speaker 1: sort of bothered by the question, and I think it
Speaker 1: sort of comes back to why SPACs historically have been
Speaker 1: associated with market peaks, and why they've historically been associated
Speaker 1: with speculative manias, and why why people are just sort
Speaker 1: of distrustful of them overall. And I feel like, you know,
Speaker 1: late stage venture exists, but in late stage I mean
Speaker 1: that already is a class. So like late stage venture exists,
Speaker 1: and you have you raise a pool of funds and
Speaker 1: then you buy stakes at a bunch of different companies
Speaker 1: and maybe a good handful of them work out because
Speaker 1: it's late stage, and then you get paid on the results.
Speaker 1: It still feels like this is a financing vehicle that
Speaker 1: could really only exist when there's lots of end retail
Speaker 1: money demand. People who can't invest put their money as
Speaker 1: an LP in the venture capital fund, people who can't
Speaker 1: get access to preferential allocation in an I p O.
Speaker 1: So it feels like it has to be during a
Speaker 1: period in which there's a lot of sort of retail
Speaker 1: speculative money out there. And it seems like unlike with
Speaker 1: a venture fund, and a venture fund theoretically only can
Speaker 1: make money if there are some like mega winners. You
Speaker 1: could theoretic you, due to the founder shares, get it
Speaker 1: do well just by doing okay, and then you get
Speaker 1: your and maybe it's not a home run, but you
Speaker 1: could still make money. So why is this not just
Speaker 1: something that is like strictly a a sort of a
Speaker 1: market top phenomenon to feed the speculative demands of retail buyers.
Speaker 1: It's interesting, but retail buyers are are relatively new to SPACs.
Speaker 1: So most of the traditional fact investors are your large
Speaker 1: investors and um. Some of that I think is opened
Speaker 1: up to not just you know, highly speculative investors, but
Speaker 1: large investors, but institutional investors that might be pension type
Speaker 1: funds or uh, you know, sort of as I said,
Speaker 1: large institutional funds so and mutual funds. So. So there
Speaker 1: are predominantly those types of investors financing these facts. A
Speaker 1: retail has been on, it has been increasing and um,
Speaker 1: and so I would say there's definitely some retail speculation
Speaker 1: going on, but it's certainly not the they are not
Speaker 1: the largest investors. They're not what's really driving the investment
Speaker 1: that you know, the significant investments is back, although they
Speaker 1: are the retail market investments have increased. So your stack
Speaker 1: fusion acquisition is uh, it's already trading under the ticker views.
Speaker 1: What have you, um, what have you learned so far
Speaker 1: from the stack experience or what has surprised you in
Speaker 1: this fact process. So one of the things I've I've
Speaker 1: learned which is actually pretty basic and it's fact. But
Speaker 1: I mentioned before that the shareholders have the ability to redeem,
Speaker 1: and I think it's important to hit on this topic.
Speaker 1: But when the SPAC is going through what they call
Speaker 1: the de SPAC process, so when they've found a target,
Speaker 1: they've negotiated a transaction, and now they have to put
Speaker 1: it to investors, and some of the investors, including institutional investors, UH,
Speaker 1: if they see you know, a bit of a pop
Speaker 1: on the announcement, they might want, you know, to redeem
Speaker 1: their shares and take the money now for whatever reason,
Speaker 1: or they might not like the deal. So to mitigate
Speaker 1: the risk of a lot of money coming out, the
Speaker 1: SPACs typically enter into an additional financing arrangement for that
Speaker 1: despact transaction, and that's usually done through what's called a PIPE,
Speaker 1: a private investment in public equity. So during that process,
Speaker 1: what I've come to realize, and we're not at that
Speaker 1: process yet, but i've been you know, UM learning about it,
Speaker 1: is that the spact sponsors, you know, negotiate with the
Speaker 1: PIPE investors so that that there is this backstop if
Speaker 1: you will, to fund significant redemptions if they're significant redemptions,
Speaker 1: and that's another opportunity where the SPAC sponsors might have
Speaker 1: to UM negotiate to give some of their founder shares
Speaker 1: to attract the investors provide PIPE, so they're there throughout
Speaker 1: this SPAC process. There are these different opportunities for negotiations.
Speaker 1: So certainly in the beginning UM trying to get investors
Speaker 1: to come in, and when you do your road shows,
Speaker 1: you definitely get a sense of what the investors are
Speaker 1: looking for. Then there's the agreement with the negotiations with
Speaker 1: this fact target as well as the potential negotiations with
Speaker 1: a PIPE financing. And when you think about these facts
Speaker 1: we raised Fusion acquisition, we raised three fifty million, but
Speaker 1: you're typically looking for something three, four or five times
Speaker 1: the size of your SPACK to acquire and that that
Speaker 1: helps reduce any of the delustion of the founders shares,
Speaker 1: the founders warrants UM. So that's one thing I've I've learned,
Speaker 1: and the other thing I've learned it's just really exciting.
Speaker 1: I know, the market is kind of crazy at the moment,
Speaker 1: but it's exciting to go through the process of talking
Speaker 1: to companies looking at potential acquisitions. And this goes back
Speaker 1: to some of my experience when I was at State Street.
Speaker 1: Is really it's fun to look at opportunities and really
Speaker 1: try and select a good partner and trying to complete
Speaker 1: a quality deal. And it's it's as I said, they're
Speaker 1: not all going to be home runs, but it's really
Speaker 1: exciting to be in that process. If I were an
Speaker 1: investor in a spack and I would hope that the
Speaker 1: management team really looking out for sort of you know,
Speaker 1: really doing uh serious process and as you describe, to
Speaker 1: find a quality deal. But at the same time, right
Speaker 1: now we just see you know, this incredible enthusiasm for say,
Speaker 1: like anything that's related to electric vehicles or autonomous vehicles.
Speaker 1: How does the sponsor team not just sort of, um
Speaker 1: pick something that's hot, Like if they if I were
Speaker 1: to find some company that find some company that had
Speaker 1: some sort of laser tech that could identify other cars
Speaker 1: on the roads, like, oh yeah, this is this is
Speaker 1: autonomous vehicle tech. Autonomous vehicles hot right now, this will
Speaker 1: get a pop. Um. How do they weigh the sort
Speaker 1: of near term thirst for the market versus actually finding
Speaker 1: something that this could be a big sustainable company with
Speaker 1: long term potential. Well, on your car analogy, I think
Speaker 1: you really have to kick the tires for sure, um,
Speaker 1: And that's really critical is to do your due diligence
Speaker 1: and get a feel for management and test their their
Speaker 1: strategy and their business model and see where they have
Speaker 1: been what they have proven so far, because you're not
Speaker 1: in so early they actually have you know, you're looking
Speaker 1: for companies that have a proven business model, so you
Speaker 1: really have to do that, and you count on some
Speaker 1: of your advisers to help with that process. But I
Speaker 1: think it really comes down to looking for a company
Speaker 1: that in the in the long run, is going to
Speaker 1: be able to implement its strategy, have the flexibility to
Speaker 1: adapt and pivot when it needs to, and have you know,
Speaker 1: proven their capabilities in at least a short run. But
Speaker 1: if I were, if I were a sort of owner
Speaker 1: of the ten dollar spec shares, how would I feel
Speaker 1: confident that the sponsor management team is actually going to
Speaker 1: do the process you described kick the tires, really get
Speaker 1: to know the business model as opposed to just finding
Speaker 1: some flavor of the month that has a high chance
Speaker 1: of UM having a stock market pop when it's announce
Speaker 1: I think for the investor, it's really important to look
Speaker 1: at that sponsor and their team and understand what experience
Speaker 1: do they have, what do they bring to the table.
Speaker 1: Have they done this before, and maybe not through aspect structure,
Speaker 1: but have they been involved in valuing companies? Have they
Speaker 1: been involved in and venture cap in the particular H
Speaker 1: industry that you're looking at. Have they been as you mentioned,
Speaker 1: have they been involved in the car business. Have they
Speaker 1: been involved in technology innovation? So that's that's incredibly important
Speaker 1: for the investor who's investing in this back is to
Speaker 1: do their due diligence on this back team and make
Speaker 1: sure they understand what they're trying to accomplish and what
Speaker 1: what they bring to the table. I have a really
Speaker 1: really cynical question, um. And you know, I'm sorry because
Speaker 1: like many of these questions have been really cynical. Um,
Speaker 1: and I'm probably going to take it to a new
Speaker 1: level here. But if someone invests in a spack and
Speaker 1: and it all goes wrong, um, because management makes a
Speaker 1: bad investment decision, or you know, say they invest in
Speaker 1: a company that was cooking its books in some way
Speaker 1: or another and they didn't perform the proper due diligence
Speaker 1: that they should have. What recourse do investors have in
Speaker 1: that situation and what protection do the sponsors have legally
Speaker 1: for those kind of disputes, I think in in those
Speaker 1: types of disputes after this back has been completed, So
Speaker 1: after the business combination has completed, you're really looking at
Speaker 1: the typical shareholder rights that that might come into play
Speaker 1: before this back combination is completed. Because you know, fraud
Speaker 1: happens and companies cook their books, so you know, it's
Speaker 1: it's sometimes incredibly hard to uncover that in even the
Speaker 1: most thorough due diligence. So the there, you know, will
Speaker 1: be those situations you'll see when something really bad happens,
Speaker 1: as in any investment that you might make in the
Speaker 1: in the in the public markets. So you have the
Speaker 1: shareholder rights that that you would see in any publicly
Speaker 1: traded equity that's listed you know, on the in the
Speaker 1: at least in the US, it's listed on the exchanges.
Speaker 1: The SEC protections if you will, for for protecting against
Speaker 1: investors against fraud. But going into the business combination, if
Speaker 1: you're not keen on the company that that is being
Speaker 1: presented um and again you at least have more kind
Speaker 1: of more but certainly significant amount of disclosure that's being
Speaker 1: provided to you, you can you can take your money back,
Speaker 1: you know, so you can get the the the cash
Speaker 1: your proportion of the cash that's held on that trust.
Speaker 1: But after after the deal is done, it's really just
Speaker 1: like any other publicly traded equity. What's what's the next
Speaker 1: big thing in SPACs? So you know, we've been talking
Speaker 1: about how SPACs are already the big thing in markets
Speaker 1: at the moment, But what's the next iteration of the
Speaker 1: spack or the next trend that you see coming up?
Speaker 1: I think it'll be fascinating to see how we get
Speaker 1: through this incredibly hot market. So what what's going to
Speaker 1: resolve come out of you know, all of these facts
Speaker 1: that are in the market right now looking for targets.
Speaker 1: So how will that all play out? I think that's
Speaker 1: really going to be interesting to see. And there's still
Speaker 1: more spacts being listed, you know, every day right now,
Speaker 1: so so it hasn't cooled off quite yet, so what
Speaker 1: what will you know? We haven't seen a spack market
Speaker 1: like that yet, so how will that play out? Um?
Speaker 1: And the other thing I think we'll see, especially with
Speaker 1: with Acman uh, you know, putting out such significantly new
Speaker 1: deal terms is how will they evolve? So how will
Speaker 1: how will these structures become even more beneficial to not
Speaker 1: only the targets, but in the end, the investors and
Speaker 1: that I think, you know, we'll see. We are already
Speaker 1: seeing evolution in the terms of SPAC deals. I think
Speaker 1: we will continue to see that. They'll be fascinating to watch.
Speaker 1: Is the market for spects sufficiently hot enough such that
Speaker 1: if Tracy and I wanted to quit our jobs and
Speaker 1: launch like a media spack with using our name and
Speaker 1: using our wide audience from the podcast, that we could
Speaker 1: pull one off of this market. That's the real question. Well,
Speaker 1: if if Billy Bean and Paul Ryan could do it,
Speaker 1: that's what That's what That's what I'm thinking. I feel
Speaker 1: like we're that kind exactly. Just let me know. And
Speaker 1: the other thing you see is repeats facts, especially from
Speaker 1: some of the big from some of the big sponsors,
Speaker 1: is they do one and then they go on and
Speaker 1: do another. And I think what happens is when you're
Speaker 1: out there looking for one, you see multiple opportunities, and
Speaker 1: maybe some private companies that aren't quite ready, but they're
Speaker 1: going to be there and six months to a year,
Speaker 1: and so I think you see opportunities and that's why
Speaker 1: you see so many. It's why I think that's one
Speaker 1: of the reasons you see repeats facts seat fact sponsors. Right,
Speaker 1: all right, well, Joe and I are going to work
Speaker 1: on our repeat series of spats with extremely generous sponsor
Speaker 1: terms for for for both of us. Okay, Kelly, you've
Speaker 1: been so generous in answering all of our very cynical
Speaker 1: spat questions, So thank you so much. Really appreciate your time.
Speaker 1: Kelly Driscoll from Fusion acquisitioning for Thank you. It's been
Speaker 1: my pleasure. Thank you very much. Uh So, Joe odd
Speaker 1: thoughts back, that's next, right, I mean like we could
Speaker 1: do one. Right. I'm a little bit worried about like
Speaker 1: legal liability if everything goes wrong, but yes, in theory,
Speaker 1: we could. You know. I often think like when there's
Speaker 1: a boom, I'm like, the only real idiots are just
Speaker 1: the people that don't just like dive in and take
Speaker 1: advantage of it. Like I remember thinking like with all
Speaker 1: the I C it's like, you're really idiot if you're
Speaker 1: not like trying to launch an i C right now.
Speaker 1: And I kind of feel like we're sort of stupid
Speaker 1: for not launching us back. But I think we should
Speaker 1: just you know, stick to podcast stuff like that. Yeah, Okay, Um,
Speaker 1: but you know what, you know what I kept thinking
Speaker 1: during that entire conversation, We're talking about SPACs as this
Speaker 1: sort of late stage market phenomenon, but I have no
Speaker 1: idea what stage of the cycle we're actually in at
Speaker 1: the moment when it comes to the economy. And I
Speaker 1: know you don't like the subject of or you don't
Speaker 1: like the simplistic take that markets are sort of divorced
Speaker 1: from the real economy at the moment, but you have
Speaker 1: to admit that that seems kind of out of sync
Speaker 1: at a time when a lot of businesses are struggling
Speaker 1: for capital, smaller businesses, at the same time, we have
Speaker 1: this boom in spacts that you know, companies that are
Speaker 1: being pursued by spacts aren't having any trouble whatsoever and
Speaker 1: getting new capital. It just feels really, really strange. Now,
Speaker 1: it is really strange, But I do think and I
Speaker 1: still can't get away from this idea that just structurally,
Speaker 1: as a market, it kind of feels it fits with
Speaker 1: periods of speculative media that like in theory, like you know,
Speaker 1: I p o s can exist throughout every cycle and
Speaker 1: venture and pe. But it feels like SPACs as a
Speaker 1: financing vehicle have to be associated with some sort of
Speaker 1: speculative fervor some sort of euphoria on the market. And
Speaker 1: I think you know where we are in the business cycle,
Speaker 1: I don't know. And how much longer this bowl market
Speaker 1: can go on, assuming it's still going on by the
Speaker 1: time people are listening to this, I don't know. But
Speaker 1: I don't think there's anyone who's doubting that there is
Speaker 1: a lot of sort of hunger for risk in this market. Yeah,
Speaker 1: a lot of hunger for risk and a lot of
Speaker 1: I don't want to say naivete, but like trust in
Speaker 1: people able to achieve those returns. And I think that's
Speaker 1: one thing that really came through the conversation is just
Speaker 1: how important the managers or the sponsors actually are to
Speaker 1: making this fact a success and you're sort of completely
Speaker 1: dependent on them. I mean, you do exercise some rights
Speaker 1: over the companies that they acquire, you can vote on them,
Speaker 1: but really it feels like you're quite dependent on them
Speaker 1: to make the right decisions. Trust is a really good word,
Speaker 1: a really good way to put it, and I think
Speaker 1: it's one of those things that trust and confidence kind
Speaker 1: of emerge in bold markets. Um, and it's one of
Speaker 1: those things like when you know, one day the tide
Speaker 1: does go out and you're, like other words, untrustworthy players
Speaker 1: in the market. But yes, right now, whether it's the
Speaker 1: confidence that Elon Musk will be able to deliver on
Speaker 1: all his dreams or the Nicola guy or whatever it is,
Speaker 1: there is a lot of faith in various managers and
Speaker 1: individuals that they will be able to deliver something extraordinary.
Speaker 1: And right now, you know the investors who make those beliefs,
Speaker 1: they're doing very well. Yeah, I think that's exactly right. Okay,
Speaker 1: shall we leave it there. I'll see it there. This
Speaker 1: has been another episode of the Odd Thoughts podcast. I'm
Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy
Speaker 1: Alloway and I'm Joe Wisntal. You could follow me on
Speaker 1: Twitter at the Stalwart. Follow our producer on Twitter, Laura Carlson.
Speaker 1: She's at Laura M. Carlson. Followed the Bloomberg head of podcast,
Speaker 1: Francesca Levie at francesco Today, and check out all of
Speaker 1: our podcasts unto the handle at podcasts. Thanks for listening.