Macro Dragon: +440% SPAC Capital - Part I

Macro Dragon: +440% SPAC Capital - Part I

• There is hot, hot… – very different from the all-time freezing & cold records being set in the Midwest of the US, that has seen gas prices jump by +4,000% in some local markets ( apparently Crypto ain’t got nothing on good old gas) – And there is kryptonite, di-no-mite, Motto Motto hot…
  
  
• No… no… believe it or not KVP is not even talking about Crypto here even though we made new ATHs with Bitcoin getting above $50,500 o/n – still stand by the Dragon’s We Ain’t Seen Nothing Yet…
  
  
• We are talking out of this world hot… which is what the SPAC market has been all about!
  
  
• SPACs have existed for a long time & are another one of the many financial products & tools available in the investment landscape.
  
  
• Here one should always take a pause & time out of determine how the bankers get paid on this, because guess who thought of these products in the first place… that’s right. So the pros/cons, rewards/risks are also a function of where you sit on these things.
  
  
• SPACs are predominantly a North American phenomenon – yet KVP is happy to flag also being reviewed here in Singapore as something to potentially be added to our competitive ecosystem (Keep an eye out for Harish’s Excellent team at Silk-Bridge Partners, Clarence’s team at Alxza Holdings & a few other MVPs, to be part of the folks that will pioneer that front if SPACs do come to the Lion City)
  
  
• In 2019, global value of SPAC capital raises went up by c. +22% to $16bn, across 146 deals. Pretty decent clip of growth, in an overall bullish market. Then something happened in 2020… wait for it…
  
  
• Issuances jumped up by +440% to $85bn, with c. 300 deals – making a record for the space, which is almost surely going to be passed…
  
  
• …in 2021 as YTD we have already seen +$46bn in SPAC issuances across 152 deals!
  
  
• And of course we got KVP’s boy Chamath @ Social Capital, being labelled as the King of SPACs… he was the one that structured the pre-IPO deal around Branson’s Virgin Galactic [SPCE].
  

SPAC 101

• So what are SPACs? How do they work?
  
  
• SPAC = Special Purpose Acquisition Vehicle
  
  
• At their core, they are basically blank cheque companies that have been created with a specific mandate (investment thesis/theme) in mind to invest their shareholders money.
  
  
• So for instance, lets say we put together the Dragon Squad of 4 individuals with a background in, Hospitality, Tourism & Leisure Travel – where they feel a lot of that industry has been decimated due to Covid-19, global shutdown etc.
  
  
• These four horsewomen & men assemble a SPAC with a mandate to invest in that space. They raise $100m, from investors who like & want pure exposure to the investment thesis (SPAC’s mandate), in a company which then gets listed. They have a certain amount of time in which to make an acquisition in their space, after which if they are not successful, the capital gets returned to investors.
  
  
• The pros of the SPAC pathway are the speed of which they can be done, 4-12m… as say opposed to an IPO pathway that can easily take 2-3yrs. So a lot of time is saved & as regular readers of the Dragon know, this is the biggest misallocation of resources & resourcefulness, its time. Generally speaking, we can get everything back… yet not time.
  
  
• They are super flexible, because one is not tied up with the baggage that would come with a company – be it controlling shareholders of different views, constraints on strategy, balance sheet, leverage, cashflows, etc.
  
  
• They are obviously leveraged for the principals, as well as amplified focus for investors – i.e. instead of say buying company X that has a 10% exposure to the Emerging Market Healthcare Equipment & Systems space, they can get 100% exposure to that theme.
  
  
• Overall we have had a structural decline in companies going public, so SPACs always have the scarcity factor of bringing private companies public on their side which can sometimes result in very favorable demand/supply factors – especially or areas that have been very much in demand such as anything to do with Space or SaaS.
  
  
• Generally from an investors perspective, they gain liquidity (can redeem their shares if they got into the SPAC before it listed) & can treat it as a free call option – i.e. some SPACs rise in value before even an asset has been a targeted, let alone successfully completed. The majority of the capital raises c. 85-99% sits in an escrow account, whose opportunity cost is exceptionally low given the level of real yields globally being negative.
  
  
• In Part II of our SPAC Capital series we will touch on some of the bigger listed names – like IPOC, PSTHU, SPCE, DKNG, CCIV, STPK – the performance of SPACs overall, as well as the potential risks & opportunities around them.
  
  
• From a Global Macro viewpoint, KVP believes we are in a regime of massive asset class inflation that is likely to last multiple years if not 5-10yrs – so whilst we may see some natural cooling off in the SPAC space... the combination of the backdrop regime, overall asset inflation & structurally lower supply of public companies likely means this is a vehicle that is here to stay.
  

Dragon Interviews…

• Next Dragon Interview is hot out the oven & set to drop soon, likely this Sat…. Stay tuned!
  
  
• Ever wondered what it would be like to be a Proprietary Trader of Global Currencies over multiple market regimes across the world?
  
  
• In the latest segment of our Dragon Interview series, we sit down & jam with the talented, as well as always witty Keith Dack – known as Dacky in the markets.
  
  
• Ever wondered how a Macro CIO would approach the top-down process?
  
  
• Discussing Global Macro & the Building Out of a Hedge Fund the AVM Way, with the Class-of-One Ashvin Murthy

• Going into year 5 in one of the toughest & dynamic changing Global Macro Regimes, AVM has returned +42.7% since its Nov 2016 inception, with an astounding Sharpe of +1.7x. Catch the great interview with Ashvin here.

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