ETF Edge - IPOs and SPACs in 2021

Episode Date: December 7, 2020

CNBC'S Bob Pisani spoke with Renaissance Capital Chairman and co-founder Kathleen Smith, Defiance ETFs President, Paul Dellaquila and ETF Trends CIO, Dave Nadig. They discussed major household names, Airbnb and Doordash, going public this week, what’s still ahead for 2021 and how they match up against the so-called “SPAC attack” we’ve already seen in 2020. In the markets 102 segment Bob continues the conversation with Defiance ETFs President, Paul Dellaquila. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchanged traded funds, you are in the right place. Every week we're bringing you interviews and market analysis and breaking down what it all means for investors. I'm your host, Bob Pisani. Major household names, Airbnb, and DoorDash are both set to go public this week. Today on the show, we'll do a deep dive into IPOs, what's still ahead for 2021, and how they match up against the so-called SPAC attack we've already seen in 2020. Here's my conversation with Dave Naughtick, Director of Research at ETF Trends, Kathleen Smith, co-founder of Renaissance Capital, and Paul Deliquilla, Global Head of ETFs at Defiance ETFs. Kathleen, let me start with you. Big week for IPOs, and it is remarkable to me that IPOs have had such a stellar year, given all of the COVID madness.

We've got 194 deals raising 67 billion, not even including what's going to be happening this week. the best year since 2014, just briefly summarize, why did we do so well this year? I think a lot of people are rather amazed about that. Well, a couple of things. We have a low interest rate environment that is very good for growth stocks, which tend to be the major constituents in the IPO market. But also, we have the COVID situation, which really accelerated the move toward the digital economy and toward vaccines. So these new companies are also major constituents in the IPO market. So those two things have really accelerated the returns, and the returns also are the fuel that drive the IPO issu issu insentions. So it's been very good for the returns on the ETF,

and we expect to see more opportunity with Airbnb and Doordash. The way this index works is they become a part of it, especially these large ones, very important. soon. So we have an early, heavier weight in these new companies than most other ETFs. And congrats on the Renaissance Capital IPO ETF. 5,000 million now in assets under management. I know you've sort of languished around with 100 million for years, and you've hit it big. And not just you've seen inflows, not just because the prices are up. And you can you clarify how quickly will Airbnb and DoorDash actually go in? Assuming Airbnb goes public, say, on Thursday, as a plan, how quickly would it go?

go into the Renaissance Capital IPO ETF? It will go in sometime after five days of trading between that period and when we do the rebalance, which is happening on December 18th. And this is a transparent ETF. We will be sending out an announcement several days ahead of time about their inclusion and when they'll be included. Okay. Paul, it's been a remarkable year for SPACS as well.

I mean, we all know SPACs had a kind of not a great reputation a few years. ago, that's changed considerably in the last couple of years. 200 SPACs raised $64 billion. It's remarkable. SPACs raised about the same amount of money this year as the IPO market did. So a few years ago, they were hardly on anybody's radar. Now they're back. Why have we seen this sudden sea change in the SPAC business in the last two years?

What has happened that has made SPACs appealing, at least to many people, alternative to IPOs? Yeah, and Bob, I agree with Kathleen, too. The rate environment has a lot to do with, I think, IPOs in general, but also SPACs. And before 2017, I think you've got to go back to 2012, you even recognize the name that actually derived from a SPAC 2012. And to your point, I think a lot of the names were unknown, a lot of the management teams creating SPACs were unknown. But what's happened over the last two years have you seen some high-profile companies

actually choose the IPO via SPAC, Virgin Galactic being one of them, they IPO last year. They've got a big space test flight coming up this week. So a lot of eyes on them. Giraff Kings has been the big one from 2020. And anyone who's into football, fantasy sports, is the name that everyone is aware of. And Luminar Technologies, actually, a pretty high-profile company that IPO last week was also via SPAC. So you're seeing high-quality companies choose to go this route. But secondarily, and maybe even more important, it's the SPAC sponsors. You're seeing much more credible investors step into the space. And you look at a name like Bill Ackman, who's raised $4 billion for an acquisition or SPAC. Michael Klein, who is a city group executive and is a renowned

dealmaker, is now working on his fifth SPAC. But also, you're seeing very legitimate private equity firms, CPG, Apollo Group, Goldman Sachs has done a couple acquisitions. They're actually creating SPACs. And I think the way they're going to be thinking about using them on a go-forward basis as additional tools is going to even add more credibility to the space. It's going to continue growth. I think those are two of the big catalysts for what you've seen in 2020. Dave, weigh in on this. I'm as impressed as anybody about the growth of SPACs, but we all know they had a sort of a bad reputation. Let's be blunt about it up until a couple of years ago. And the basic premise still is there, Dave. It's trust me, I'm famous. You know my name. I'm really

famous, right? Did I tell you I'm famous? I can raise a lot of money because, hey, I'm famous. What could go wrong with this scenario? The trust me, I'm famous, you know, idea. There's a reason why SPACs are different than IPOs. And fundamentally, SPACs let companies come to market with some pros and cons. They have slightly less scrutiny. The amount of work it takes to get a SPAC merger done into a SPAC vehicle is simply less exhaustive than it would be if you were going through the full IPO process. On the flip side, it allows a company that perhaps doesn't have a long operating history but can say very positive and credible things about the future

to actually come to market and talk about those things. Companies that come to market through a SPAC merger are allowed to do things like give forward guidance. And if you've ever been through the IPO process or invested in IPOs, they get locked down real hard. So you don't get to ask management companies about things like, hey, what's the pipeline look like for the end of next year? You do get to do that in a SPAC. So there's reasons why it's an attractive vehicle, particularly for smaller growth companies, often coming out

of the private equity sort of train. And I think that's what we're seeing. Spacks are becoming this vehicle for companies to go from private to private equity to the public markets, and sort of a long, thin line, if you will. But what can go wrong with this? I'm sorry to be so curmudgeonly about it. I mean, First of, there's the obvious thing, which is neither SPACs nor IPOs are subject, they're subject to the laws of gravity like everybody else. If the market turns south or if the economy turns south, they're not going to do as well. That's kind of obvious. But is there anything that worries you about SPACs that could independently cause them to dramatically underperform?

We've got over 200 that are sitting out there looking for targets right now. Are they all going to outperform or are they going to do notably worse or better? They're going to be winners and losers. and like any market that is disparate, right? Remember, a SPAC or an IPO fund is investing in all of them. They're not simply saying, we're going to pick the good tech ones, but we're not going to pick this health care one we don't believe in, right? So in both of the – and that's been a great approach.

I mean, I think Kathleen's fund's up over 100 percent this year. It's hard to argue with the returns we've seen. But with those, you know, potential excess returns come obviously enormous risks. And I think it's important to point out that what you get in something like a SPAC or an IPO fund that's pooling these things together is sort of the last tail end of private equity, which tends to be related. So if you look at what's coming to market through SPACs, you're not seeing like a lot of utility companies come to market this way. What you're seeing is, you know, internet companies, technology companies, biotech companies,

firms that are out there on the cutting edge. And with that cutting edge comes the opportunity to get cut. Yeah, that's a good point. Kathleen, give us a preview of 2021. The IPO market is certainly not going away. There's a couple of high-profile names coming. Give us a quick rundown of four or five of them and one we might expect to see something. Sure. I will add that private equity and venture

has had so much inflow into these asset classes, that having the IPO window open and this new better vehicle for a SPAC is helping this asset class, which basically has had locked in capital, and hasn't performed that well relative to owning public equity. So this is a great relief, I'm sure, for every venture capitalist and private equity firm to have these outlets for finding liquidity.

As far as what's coming up. Well, that's an interesting point. Before you get to your point about 2021, that's an interesting point. So you're saying that actually SPACs are good because it brings in other companies and maybe lesser quality companies that wouldn't, have gone public or have not been successful going public? You're saying it more SPACs actually makes IPOs look better? Or am I misreading what you're saying?

Well, I'm saying that it's helpful to private equity and venture pools of capital because this is an outlet that has enabled them to find liquidity. They've pretty much only had IPOs, which are a much more discerning area of the market. So now they have this other access to capital. And so that should help them. From an investor standpoint, I think we have to constantly look at returns.

And returns are what investors need. If a product is not producing those returns, then the product isn't of value to investors, where really the buck stocks, I think. So you want to look at that and with a good dose of caution to make sure the IPO market, just plain will shut down if returns aren't there. And that'll be true of specs too. Yeah, it's a good point. We actually have, we mentioned DoorDash, Airbnb coming this week.

We also have three other billion dollar IPOs on the calendar before the end of the year. So in Roblox, we're going to see Affirm and Wish, and it's going to make this year a year with more billion dollar IPOs than any other year we've seen in history. So a lot of big companies are coming out. They've been private for a long time, and now they're coming out in this better market. Beyond that in 2021, we think that Elon Musk's SpaceX may try to tap the market. We're also hearing a lot about Stripe, which has a very high private valuation, the mobile payments company, Instacart, the grocery delivery company. And we think that Alphabet's Waymo, the Autonomous Driving Division of Alphabet, will tap the IPO market in 2021.

Yeah, this is pretty remarkable. I'm wondering, Paul, if you think this space race, or SPAC race with IPOs is going to continue in 2021, I spoke with BTIG the other day, and they said there's 210 SPACs that are out there right now seeking acquisitions. That's as many as happened last year, or this year. That seems like a remarkable number. I mean, it seems, unless the market turns down, SPACs are going to have at least as good a year as 2020. But what are your thoughts on this? Yeah, and we partner with a firm called SPAC research.

So we actually have the deal flow right on our website, DefiDTS.com, that will actually show. show you how the SPACs are coming to market each day. And we're seeing, you know, two to five, maybe not two to five a day, but two, three a day that are coming live. And that's been a trend pretty much all years. I think there's going to be that kind of growth going into 2021. And I want to pick up a point from Dave and Kathleen, because I think the private equity point is an interesting one for why SPACs are attracted. Because for a lot of investors, the private equity market is something they can't tap into. So if you're a smaller retail investor, a small, our financial advisor. You may not have access to the best debris private equity funds out there.

What a SPAC offers up is sort of that private equity-like return. So yes, you're going to take a risk on a management team. Yes, you know, they have to perform in order to seek those returns. But when the winners tend to win, they tend to be pretty outsized returns. I think that's what the appeal of a SPAC is. And I think what you've seen from a return perspective from the actual SPACs, and then the actual post-IPO SPACs, like so when they've actually merged with a target, The winners have won in a big, big way. So, you know, I was thinking on the ETS, exactly as Dave alluded to, you're going to have the winners in there, but you're also going to have some losers.

But the diversity of the ETF will hopefully keep up with a return profile that's similar to a private equity-like return for investment. Okay. Kathleen, let me ask you about the IPO ETF. My colleague in the segment I was just on the air with her asked me whether or not you would ever consider including smacks in the IPO ETF. Would you ever consider doing that? And if not, why not? Or is that a... Well, in this current product, our rules say you have to be an operating company, and it takes almost two years for a SPAC to turn into an operating company.

So under the current strategy that we have, SPACs would not be included in this index. We're interested to see how the SPAC ETF performs and the strategy behind that. I think, you know, maybe you're digging into some. some opportunity there, but our existing product is going to be purely IPOs, regular way IPOs. Okay. Dave, let me just, while I have you, ask you very briefly your thoughts on the remarkable year for ETFs in general.

We passed $5 trillion in assets under management, huge inflows in the first part of the year into bonds, but now huge inflows into equities, value. Small caps have seen huge inflows. recently. Could you wrap up 2020 for us and give us a quick look at 2021? Sure. I mean, you know, Bob, we talked about this at the beginning of the year. Anytime we see significant market volatility, we see the same thing happened since 1993, which is high fee, low-performing, active traditional mutual funds bleed assets like no tomorrow, and that money shows up for the most part in ETS. That's precisely what we've seen so far this year.

It's going to be record inflows by the time we get at the end of this year. It's going to be hundreds of billions of dollars, if not close with trillion dollars out of traditional mutual funds overall. That's just a story we see over and over again. The structure is better for investors. It tends to be cheaper. It's always more tax-efficient. I see absolutely no reason that's going to change next year. Okay.

Thank you, everybody. This has been very interesting. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is our Markets 102 portion of the podcast. Today we'll be continuing the conversation with Paul De Laquilla from Defiance ETFs. Paul, thanks for sticking around and chatting with us a little bit more. I really appreciate it. I wonder if you can give us an analysis on 2021.

I have been rather amazed to see that SPACs raised just as much money as the IPOs have in 2020 overall. I think that's a remarkable achievement. Given that SPACs had a sort of bad odor about them up to a couple of years ago, do you think there's any chance at some point? it's even this year, but 2021 and beyond, SPACs could become an even bigger competitor IPOs and overtake that IPO market? And thanks for having me, Bob.

And I think it's important to put it in context, too, because I don't think it ultimately will replace IPOs. I think traditional firms will, you know, you look at something like an Airbnb, a traditional route might be very good for an Airbnb or a DoorDash, these super huge companies you're going to have massive IPOs. For some smaller companies, companies, though, that are looking to come to market a little bit fast and they might have a little bit more cutting-edge type of technology, then SPACs are going to be very attractive.

So can they continue to keep pace? Absolutely. Can they overtake as far as maybe deal size eventually? Sure. But I think the other part of this, too, is looking at tools for private equity firms. More and more private equity firms are coming out with SPACs. And I think this gives them an additional tool for liquidity of their portfolio. So if you think about a private equity deal that might, actually bring a public company private. If they wanted to spin off a division, now they have a SPAC to ultimately do that with. So it's another tool that they have in their toolbox. And I think that's one of the reasons you're going to continue to see more and more SPACs with higher credit and quality firms as far as sponsors coming out in 2021 and beyond. Well, I'll tell you the reason I like SPACs is I'm in favor of more companies going public. It's been very depressing to me for covering IPOs for the last 23 years, how bad, how limited the market is. We have these

unicorns sitting out there that are kind of going into middle age now, even Airbnb. He's been out of a long time. And the public can't really take advantage of that. Private equity is nice, but it's fairly difficult for the public to access it. So you've got a small group of people getting rich on what would have been companies that would have gone public years ago because they can just sit there and do the low interest rates take a lot of money from private equity. So I'm all in favor of SPACs. I think the concern that I have here is what could possibly go wrong with this? Is there a company? Could you say it would be better if some companies use the SPAC route and why? Could you explain what would be a good company use a SPAC versus an IPO? Make a distinction

between the forming? Sure. So if you look at a company like Luminar technology, and they just, they just IPO last week. So the premise of the company, they build basically optical and laser technology for autonomous driving vehicles, right? Now, an autonomous driving vehicle, full autonomous, it doesn't really exist yet. However, investors, as you said, want to access this company. So for years, they've been getting private funds. However, no public investor, you know, mom and potts at home can really access that company. Now because of the stack, they were able to do so, and they were able to agree upon a price with that SPAC as to how they're going to IPO.

So in other words, in a volatile market like we've seen, especially in 2020, we've had a lot of ups and downs that does impact the pricing of a traditional IPO. You're not 100% sure where you're actually going to get priced at. And you could ultimately leave money on the table for the company. You could ultimately price too high for investors. With a SPAC, you're able to agree upon that beforehand. So a company like Luminar that's a little bit more in the infancy of its life cycle relative to an Airbnb, you know, we should say, because again, why, why, why didn't Luminar, let me just finish my point, why didn't Luminar use an IPO to go public? Is that all it? That's it. They just could agree up on a price very early. I mean,

what prevented Luminar for doing a regular IPO? So there's other two aspects to that, right? Typically, the management team of the company that's going public has more control via a SPAC. They don't give up as much control. Also, typically a SPAC sponsor is bringing something to the table. So in other words, when a company sponsors is SPAC, they're saying we're going to focus on energy companies or we're going to focus on technology. Bill Ackman has a little bit of different approach. He's going more open, right?

So kind of the best deal out there. But they're bringing something to the table. So Luminon, I can't speak specifically, but they might have found that that SPAC they were bringing something to table to help them navigate the private world into the public market. It could have been about control. It could have also been about typically a private company via SPAC in about three to five months can go public. That process is usually in the 12 to 18 months for a traditional IPO process. I still don't quite get this.

You keep bringing up the SPAC sponsor, that he brings a famous sponsor in, but it comes at a price. The SPAC sponsor gets a piece of this, right? I mean, aren't they getting, I don't know what the number is, like 20% of the proceeds there? They've got skin in the game. There's a significant cost of the company to having this famous sponsor come in, isn't there? Well, actually, I actually look at that as a benefit, right? So in other words, the SPAC does have skin in. Typically, 20% of the shares of SPAC are called founder shares.

The other 80% are accessible to the public. So it's almost like a, in a way, it's like a call option, right? You're going to have a price that's level, anything above that, both the sponsors and the public, will participate in the return side. And let's not excuse the fact that in a traditional IPO process, there are underwriters are involved. There's a lot of hands in those pockets as well. So it's not as though it's a free of charge type of deal to go to the traditional route. I think no matter how you go public, maybe direct listing a little bit different, but the two bigger routes right now, SPAC and traditional, the company is going to be giving up something

in order to gain access to those public markets. But if you underwrite with Goldman or more than family or any of these other firms, you're still going to be paid. and fees to be able to do so. But that's true in SPACs and IPOs. I guess my point here is with the sponsor, the founder's shares, there's a significant cost to the company. So it's not free. It's not as if, oh, I'm a famous person.

I'm gratuitously giving advice to you out of the goodness of my heart. There's a significant cost of the company. You mentioned the cost, it's true. I mean, the Goldman Sachs of the world charge significant amounts of money to IPO. Five points is really typical. Five percent is typical to charge a cost. to charge of the amount that they're floating. But you do this with SPACs too.

I mean, if you went to Canter Fitzgerald, I guess, who they're a SPAC sponsor and asked them to hope, they'll charge you percentages too, right? I mean, the costs are still there for a SPAC if you seek a company to help you out. For sure. And even if you are a private company that's not using a SPAC to go public

and you're looking to raise capital from private investors, you're going to have to pay a price. and that's dilution of the equity for the original owners of the company. So there's a cost associated with raising capital. Capital is not free. So no matter what route you go to, if you're going to, you know, for instance, Luminar was about a $3.4 billion deal. If you're seeking out that kind of money, there's going to be a cost associated with that.

And what you're banking on is that with that capital, you know, perhaps with the expertise that management team is bringing to the table, you're going to be able to grow the business at an exponentially higher rate than you would have had not paying those. cost for the access to those funds. So it is up to the management team to then execute, right, which is what all comes down to. And let's put it out there, right? So like, stats are not immune. So you have Nicola right here who is used, used the stock to IPO. And they're navigating this right now. So there are questions about their business. They're very adamant about the fact that they're going to develop hydrogen technology, which can be an extremely beneficial thing for

not just the company, but, you know, humanity in general. If they're able to execute on that vision, there's a lot of upside there. However, as an investor, what you have to question, you know, are they going to be able to do that? And that's ultimately the game you're going to play with any investment. Do you believe in what they're doing as a team? Right. And can they execute on that vision? So let me just sort of close this out by saying, what could go wrong in 2021?

I've said this many times. IPOs and SPACs, they're subject to the same rules of gravity as everybody else. if the markets do well, they'll do well. There'll be more of them around, and they'll perform better. If the markets don't do well or the economy doesn't do well in 2021, they're going to see less of them. That's a given. Is there something that could go wrong with the structure of it overall?

I guess the question overall is there's going to be studies done of IPOs in the last couple of years. Up until a couple of years ago, excuse me, SPACs, SPACs have not performed very well. aftermarket. I think that evidence would indicate they have been performing better since people like Chumach Palah Hippatia got in and the Michael Klein's of the world and everybody else. But what could possibly go wrong? Is there anything that worries you? So, I mean, if capital were to dry you up all of a sudden, so, you know, if you think about what happened, you know, March and April this year is a perfect example. If you have such a volatile market and I agree completely with what you're saying, you know, if the FMP is down 25, that's

not going to be well for IPOs or SPAC. So, you know, in environment like that, if capital dries up, you know, that could potentially be a pitfall. Also, you mentioned there's 210 deals out there right now, is SPACs looking for targets. I have very little doubt. Most of them are not going to succeed, right? Not maybe most, but at least some of them are not going to succeed as far as either finding a target or they're going to pick the wrong target. So I do think, you know, there's a benefit for particularly advisors or individual investors looking for an ETS. So you have diversity. You're able to capture the winners and then hopefully balance out what you might face with some of those losers that might not be performing as well. So I think it's those things that you're thinking about. The other

counterpoints of what I just said, though, is actually in an environment where liquidity becomes more of a crunch, if you're a private company, you still may be seeking capital. Keep in mind, a SPAC has two years to actually find a deal. So in an environment where there is more of a headwin, there's more of a challenge to find capital. Spass could be a very big liquidity source, they've raised capital over 2019, 2020, and if there's a capital crunch, so there could be some benefit in that. But I do think, I think capital markets are always going to tie in with any sort of IPO. And if you look at how Morningstar classified as our ETF, it's in the small growth bucket. So, I mean, that's what you have to be thinking about. Okay. All right, Paul, we're going to

leave it right there. Thanks for joining us. I really appreciate it. Paul Deliqqua is with Defiance ETFs that runs the Defiance ETFs. The symbol is SPAK. Everybody. Thanks for joining us on the ETFA podcast.