An Interview with a Professional SPAC Investor
“Jessica Livermore” Provides an Investors Perspective of the SPAC Product.
Last week, I had the opportunity to sit down and discuss SPACs with an investor who requested we call her “Jessica Livermore”, or Jessica for short. Since she is an active participant in the SPAC market, she would prefer to remain anonymous and it freed her up to speak candidly (I get that).
So with that being said, I wanted to see the SPAC product through the eyes of a professional SPAC investor to get some perspective. The truth is, even though our backgrounds come from opposite sides of the table, banker versus investor, we both just really like the vehicle. As Jessica said, “Where else can you buy something with this kind of risk/reward opportunity?!”
Jessica has been investing in SPACs through her dedicated SPAC fund for more than five years, but has been investing in them since the early 2000’s. To be sure, she is passionate about the SPAC product and that clearly comes through when she is discussing them, or is giving advice to potential new SPAC teams, or even contemplating sponsoring one herself.
Investing in SPACs
So I started by asking Jessica, “How do you decide which SPACs you want to invest in?” She said, “I wish I could predict which management team is going to bring me a great deal where the equity trades well above trust, but I can’t. While insights can be gleaned from meeting the management team, understanding who and what they are and understanding the history and process of the underwriter, the outcome CAN be handicapped, but it is still largely random. So why not own some of all of them?”
She continued, “Currently I do own all of them except for maybe three or four. I will, however, bias my portfolio based on how the management team impresses me or based on a thesis, such as a sector which I think has a lot of future potential, or maybe I will bias my portfolio via the ratio of shares to warrants and of course the banker’s track record. But it really is a blind pool so I find it advantageous to own them all because there is little to no downside risk.”
Since the SPAC market is so active, I wanted to know if that meant she needed to hold back on the size of her indications in order to have enough in reserve to invest in forthcoming SPACs, i.e., is it making her choosier?
“I always need to be choosy,” she said. “There are many factors involved in sizing allocations but, of course, capital availability will be a dominant one. However, in recent months the secondary market has become much more active and vibrant. It is easier than ever to sell, replace and manage my portfolio. With so many announced deals there are ready buyers from outside the SPAC world too. So for the most part, as in traditional portfolio management, it is a relative value decision. Which SPACs have the best potential upside from here? Is it new ones, those still searching, or ones with announced transactions whose value has not yet been recognized by the broader market?”
She continued, “However, a lot of people do not understand the investment. I’ve made my career on investing in things that people do not understand very well and SPACs are for sure not well understood. For a lot of investors, they can’t wrap their head around investing in nothing; they want to invest in something. So, there’s no operating company or balance sheet or income statement and they won’t invest because they can’t evaluate it.”
Trading of Shares and Warrants
“For instance,” she added, “look at Pure Acquisition Corp.’s warrants.” Jessica believes Pure’s warrants are extremely cheap right now trading around $1.30. “There’s no risk since they’re worth a dollar right out of the gate and even upon liquidation of the SPAC. They should be trading much higher.” Again, she believes this is partly because the structure is not well understood.
She further added, “But when a SPAC announces their combination, I don’t believe I’m smarter than the market, so if the Fidelities of the world are evaluating these acquisitions and after their substantial armies of Ivy League analysts and portfolio managers determine where this SPAC should be trading, I’m not going to go against that, or rarely. If it’s not trading well, I’m not willing to bet that I know better than the consensus and at that point I’m a seller or a redeemer. And conversely, if it is trading well, I’m not selling and maybe I’m buying. I should note that I do buy mostly shares once it splits.”
Jessica Livermore to Sponsor Her Own SPAC?
Jessica has come across many, many teams that want their own SPAC. “It seems like everybody and their brother wants to do a SPAC right now”, she said, “but, I worry for them on a personal level. I worry that they don’t fully understand the risk/reward analysis and don’t appreciate how challenging getting a deal through the process can be. I like to provide a rational, reasonable and honest assessment of the risks and rewards so that potential sponsors who approach me understand the challenge they are about to undertake.”
As far as issuing a SPAC herself, Jessica says she has considered it in relationship to her private investment activities outside of her hedge fund. “I do want to do a SPAC, but I know I wouldn’t be able to command 1/3 of a warrant right out of the gate. So I would be looking at something more like a full warrant and if I had to make a choice between a premium maturity or one of shorter duration, I would choose shorter duration. Because there’s no cash risk, but…there is time risk which I believe our valuation proposition can reduce. Cash risk is unavoidable.”
Completion Deadline Extensions
I also asked Jessica about completion deadline extensions and she gave me a fresh perspective on something I felt (again, coming from a banking background where the bankers represent the issuer) was something to be dreaded. She said, “There is no one forcing Sponsors to extend. Again, everyone is an adult. They are choosing to do this and are fully aware of the risks. Plus, without extensions there are a lot of great deals that wouldn’t have gotten done. Double Eagle, which announced one month before its deadline and had to extend, is now WillScot and trading around $16.50. The only ones who can potentially get hurt in the process are the Sponsors and they understand the risks.”
What she did think made the most difference in investing is the bankers. Again, she’s smart enough to realize there are other people/underwriters with better resources that have already determined that THEY are willing to go forth with X-team. Therefore, when certain bankers who rarely lose at anything, are willing to back a SPAC….she thinks that’s a good bet. But regardless, she thinks it comes down to structure. As she said, “Hard to beat owning a share of a well ring-fenced trust invested in US bills, with potential upside from an accretive merger, warrants, rights and/or a premium maturity.”
However, she says she often wonders how management teams choose their bankers. Maybe because she has considered doing a SPAC herself, she mused, “Why this team and this banker?”
Finally, I asked her what her thoughts are on how to improve the SPAC success rate and I thought she gave a pretty great and Zen response. “It’s an amazing structure and an amazing opportunity and of course, I would like to see them all trade to $12, $13, $14, but that has its downsides too. If SPACs all trade well, then instead of maturing at $10.10, they’ll start maturing at $9.90 and that’s no good for me or anyone who invests in these. There needs to be balance. Some need to fail, some need to perform so-so and some need to outperform in order to keep everything in check.”