Money Rehab with Nicole Lapin - WTF are SPACs?

Episode Date: November 18, 2021

The term “SPAC” has been thrown around in the headlines a lot lately; and even more recently, it’s been tied to big names like Donald Trump and Bill Gates. But WTF are SPACs? Here’s a teaser: SPACs may be a good fit for your investment portfolio! Nicole unpacks the concept with Ahmed Fattouh, Founder & Chief Executive Officer of InterPrivate.  To learn more about Ahmed’s work, follow this link: https://www.ipvspac.com/ Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. A really hot topic in the investing world is SPACs, or Special Purpose Acquisition Companies.

Today, I have a special guest joining me to talk about what SPACs are and what role they play in the greater financial world. Our guest is going to deep dive into all things SPACs are and what role they play in the greater financial world. Our guest is going to deep dive into all things SPACs, including defining what the heck a SPAC is. But before he does, I wanted to give a little primer on SPACs. If this doesn't click for you right now, don't worry. We'll get deeper into this definition as the episode goes on. SPACs are basically shell companies that are created to go through the rigmarole of becoming a public company. The goal of a SPAC is to eventually

acquire another company that wants to be publicly traded. It's sort of like a Trojan horse situation. The SPAC is the wooden horse that gets onto the stock exchange. Later, the acquired company emerges from the wooden horse straight onto the stock exchange without having to jump through the hoops themselves. Here's where it gets really interesting. When a SPAC goes public, the investors buying shares do not know what the target company will be. In other words, they do not know exactly what they're ultimately investing in. That's why you may hear some people refer to SPACs as blank check companies, not because the amount field would be blank, but rather the recipient field. Now that we have our primer, I think it's

a great time to introduce our special guest, Ahmed. Welcome to Money Rehab. So for those who are just meeting you here on this podcast, Ahmed, can you Money Rehab. So for those who are just meeting you here on this podcast, Ahmed, can you share a little bit about where you work, what you do, all that good stuff? Sure. I am the founder and chairman of InterPrivate. InterPrivate is a private investment firm that invests on behalf of a group of family offices. And we invest in early stage, late stage, private equity, a variety of asset classes. And a couple of years ago, we launched a SPAC strategy. Before that, I used to be an investment banker at Morgan Stanley in the beginning of my career. And then I worked at a firm called InvestCorp, which is a private

equity firm that was best known for owning a lot of luxury and consumer companies like Gucci and Saks and Tiffany's and the like. And then for over 15 years now, I've had my own firm, which was the predecessor to interprivate investing in the public and private markets. Do you still get discounts? You know, for a while I was grandfathered into this. There was a program at Saks that allowed us to get double discounts, which was pretty, pretty good. A girl can dream. So I'm really excited to talk to you about all things SPACs today. So first, can you tell our listeners who may have seen headlines about it, but are still unsure what the heck a SPAC is? So a SPAC, it's the acronym for Special Purpose Acquisition Company. They've been around a long time, but they obviously became much more popular in the last year or two.

It's essentially a structure that is used to help a company get public in a different way, which is essentially a SPAC is raised. Capital comes into the SPAC. comes into the SPAC, you raise the cash, and then you go find the company that you merge with, delivering the cash to the company and saving them the time and process and a few other advantages around the IPO process. So the end result is a company is a public company by merging into the SPAC, which was essentially a company that had nothing but cash when it was raised. And anyone can invest in a SPAC, right? It's there. Can we just clarify the structure? People have called it a blank check company. It doesn't have operations itself until it merges with an operating company, but anyone could buy it on the public market.

Sure. So SPAC goes public. It's always, almost always, but at $10 per share, they raise a certain amount of capital. It's true that probably the folks who are allocated the SPAC goes public. It's always, almost always, but at $10 per share, they raise a certain amount of capital. It's true that probably the folks who are allocated the SPAC shares are institutional investors, although do buy SPACs at $10 or even less. And they also have the right to decide, I've changed my mind. I want $10 back at the time that the merger is announced. So the SPAC structure does offer retail investors an opportunity to invest into high growth businesses with a free look in a way, insofar as if they ultimately don't like the company that the SPAC has decided to merge with, on the day of the vote, they can choose to take back their $10 a share, having read all the information about the company that they're going to merge with. Why are they below $10? So that's a good question. So the reason they're all basically trade around $10

until you identify the company is that nobody, so let's kind of segment this. When you take a company, when you take a SPAC public, it doesn't have any sort of particular target in mind. It might have a sector in mind. It might be dedicated to a certain space. We've had a fintech-oriented SPAC, we have a digital infrastructure-oriented SPAC. So thematically, they may be saying, we're going to go after companies in this space. But the bottom line is you don't know what they're merging with until then. So until then, you're just a box of cash. And you basically are holding $10 per share of cash. There's a little bit of interest, there's a little bit of warrants that moves it around in one direction or another. But essentially,

the SPAC is not permitted to use any of the cash it raised until the approval of the merger. So the SPAC is almost always just worth the $10 plus whatever you think the likelihood is of them finding a good deal. So how are SPACs different from an IPO? So a SPAC process is different insofar as you raise the money first, then you find the company. But for a company, the SPAC process is different because it offers an accelerated path to get public. In some cases, it can offer more certainty because once you've cut the deal with the SPAC, you know, certain things that you would discover in the IPO process rather late in the process after you've spent, you know, a year or more getting ready, you learn your pricing at the very end and it's sort of a very binary decision. Do I go forward or not go forward after I've done all of this?

So in a SPAC, there's more of a negotiated transaction that lets you know a lot of things before you have this come to Jesus moment at the very end. So the idea is to accelerate the process and reduce the risk. perspective that allow a company that is going through a SPAC process to share a little bit more about its projections in the future than they would be able to in a regular IPO process. And that is part of what made it so attractive in the uncertain world of COVID last year. Because it allowed companies to project farther out if they were still growing companies that wouldn't be ready for an actual traditional IPO? Yeah, I think, you know, in a traditional IPO, you know, without getting too far into the weeds, the underwriters, the investment banks are involved in the process.

And there are some very specific rules because you are actually selling the stock to the public in a SPAC transaction because the capital actually initially comes from the public in a SPAC transaction, because the capital actually initially comes from the merger of a SPAC that has already been raised or from a process called the pipe process where you raise money from sophisticated institutional private investors. You can use some of the rules that usually would be used in a venture capital deal or private equity deal, which allow you to talk more openly and have a bit of a safe harbor around your projections. Of course, you still have to have a reasonable basis to make those projections. But, but you really couldn't do that in a traditional IPO process

without taking a certain level of risk that, that you wouldn't that you wouldn't choose to take, you know, last year during 2020. because the companies were so compromised in many cases in terms of their performance for that year, the ability to discuss what life would be like for them post-COVID became more important. But of course, for all high-growth companies, the ability to talk about the future is an advantage. There's just a balance in terms of how far you go out, because you'll obviously be judged on the projections you

present with respect to the future. Yeah, it's always better to beat low expectations. That's all I know about Wall Street and buy low, sell high. Hold on to your wallets, boys and girls. Money Rehab will be right back. Now for some more Money Re rehab. I wish we had a crystal ball for Wall Street. That would be amazing. But where do you think SPACs are headed? They were super hot. Well, they were not hot for a long time. Then they were super hot. Then they kind of waned. What do you think the future is going to be? Yeah, look, if I had a crystal ball, Yeah, look, if I had a crystal ball, you know, I would, I would be doing something else at this point. But I think that, you know, my take on it is that the SPAC can be momentum goes too far and the pendulum swings in one direction than another, and then it sort of will find equilibrium eventually.

I expect that what will happen is you'll have a number of the SPACs that were launched last year will fail or they'll fail to find a target. A number of them will end up doing deals with companies that aren't probably ready to be public. And so the SPAC transaction might succeed, but the stock may not perform well. And so that will make people more wary of going into those more speculative situations. And it'll all shake out where there'll be a more appropriate number of SPACs and a more appropriate number of companies that are looking to be married to SPACs, as we saw in a lot of things like hedge funds, you know, were all the rage and continue to be a very significant part of the financial ecosystem. But, you know, six or seven years ago, everybody raised, you know, $100 million hedge fund, which was way too small to be relevant.

And just they all look the same, and they were all doing the same thing. And then there were eventually shakeouts. And you know, some of those became very large organizations, and many of them went away. So I think that, you know, what we're, where I hope this will land is that there will be more clarity from a regulatory perspective on some of the things that people are confused about right now, there will be a smaller number of experienced SPAC sponsors who have a good relationship with the investor universe that is coming into the public situations, have a good relationship with the venture capitalists who control the private companies that are appropriate to take public and have the skill set and experience to guide these companies through this birthing process. And that'll be a smaller proportion of the SPAC universe today. I think there are companies who are too small to be public on their own, but might be able to merge with one another. So there will be use cases that make sense, but I expect it will be a smaller universe of survivors. And in the

process, some of these companies that did go public that shouldn't be public, probably will not remain public. So some of them might get taken private again, some of them might get acquired by a strategic, some of them might run out of money. And I think that's one of my biggest concerns that companies that go public with a SPAC process, but, you know, raise the minimum amount of capital, and then they run out of money in the public purview and won't be able to raise more money in the future. You know, they probably should not have been public. And we have all sorts of levels of investors listening. Would you say this is more of an advanced investing play? If somebody is looking at SPACs? Well, I guess I would put it this way. I actually think

that all investing requires some analysis. I think that if you are looking to just have broad-based exposure to growth in the equity markets, there are lots of great indices that you can buy and funds that do the work for you. I think if you're going to be an individual investor, I am still a big believer in doing the work and analyzing the business and understanding the investment thesis. For today's tip, you can take straight to the bank. As you can see, at $10 a share, SPACs can be a pretty low-risk investment, and that's awesome. There have been a bunch of great companies that have gone public through SPACs can be a pretty low risk investment. And that's awesome. There have been a bunch of great companies that have gone public through SPACs. But because you essentially do not know

what company you're investing in, I would caution anyone who wants to invest in a SPAC to do their research on the SPACs leadership. You should be sure to really understand who is behind the SPAC you're looking at, just so you're certain you won't be funding a company you don't believe in. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG

Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing of Magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.