Odd Lots - Cowen's Co-President on Why SPACs Are Having Such a Moment

Episode Date: January 11, 2021

One of the surprising developments in the last year was the boom in SPACs. The so-called blank check companies raised more money in 2020 than they had in the several years prior combined. But why? Why did a year that saw a pandemic and economic devastation turn into such a boon for what has historically been a speculative financing vehicle? On this Odd Lots, we speak with Larry Wieseneck, a longtime capital markets veteran and Co-President of the investment bank Cowen, who breaks down why the stars all align for the surge in SPACs.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Eisenthall. And I'm Tracy Allaway. Tracy, 2020 will obviously be remembered for a lot of things, no doubt. You know, after the pandemic, the, you know, after the pandemic, the, all of the political stuff that we saw, the extraordinary sort of year in economics and the stock market and everything, somewhere down the list, maybe like down like 50 or 70 or 90th in terms of like the things that people look back on, I would say is kind of the year of the SPAC. Yeah.

Certainly, definitely if you're in capital markets, it's the year of the SPAC. And I think I'm trying to remember the latest. But I think it was something like $60 billion raised in 2020, which was more than the previous 10 years combined. Yeah. Something like that. Right. So we've just seen this extraordinary surge for people who don't know. It's like these vehicles where people buy into an IPO.

And then the company has some certain amount of time to then go out and actually acquire a company, bring it public, subject to the approval of the people. people who bought into the IPO. We've seen a lot in the electric vehicle space. We've seen a lot in other technology, other areas, but just generally, A, it exploded and B, you know, once like many things in 2020, not the type of thing we expected to see in the first half of the year. I think, like thinking back to March, April, May, we would not expect it to be such an extraordinary year in capital markets. Right. And I think one of the reasons that SPACs tend to draw a lot of of attention is that most people or a lot of people associate them with these sort of like pre-2008 financial crisis excesses. So there's this idea that there's so much money sloshing around in the

system. People are sort of desperate to put it to work. So they'll just stick it into a blank check company, not knowing what that company is eventually going to be and just sort of hoping that their money will get deployed in one way or another. So I think a lot of people look at it as another example of froth in the market. But again, as we discussed on a previous episode with someone who was actually running us back, there's also an argument that this makes sense. This structure makes sense for a lot of companies in the market. Yes. I think that's right. For a lot of companies, it makes sense. And I think that's also a part of the change, which is that not only where I would say where SPACs may be associated with spec out of excess.

I think they were associated to it like shady company. That's like, okay, if you had a asset, if you had a company that couldn't do the typical IPO route, couldn't really withstand scrutiny, maybe you try to take it public via SPAC. And I think it was sort of like, you know, the, they didn't leave a good flavor or taste in people's mouth. And I think that's changed. And I think that one of the things that we saw this year is like more seeming higher quality assets came public that way, more investors and banks with sort of reputable or strong

reputations willing to or eager to use this type of financing capital markets vehicle for this. And so maybe they're shedding some of their previous reputation, which was sort of not that credit. Shetting the SPAC stigma. Shetting the SPAC stigma. That's well put. Shetting the SPAC stigma. I mean, we'll see. I mean, who knows, maybe in 2025, we'll look back at the class of 2020 spacks and they'll all have flopped. There have been some flops. I mean, like, you know, obviously not flops, but, you know, controversies. Nikola was a very popular spec that surged to the moon for a while and then all kinds of questions rose about its business and its CEO left. So there are still, like, a lots of questions about the types of companies coming public this way. but it's certainly a it does not seem to be going away anytime soon, which means we need to

learn more about them. Yeah, I agree. Let's do it. So we're going to talk about SPACs. We're also just going to be talking about the extraordinary moment for capital markets in general. I'm very excited about today's guest. We're going to be speaking with Larry Wiesenak. He is for the last three years.

He's been the co-president at Cowan Company and has a long career. doing global capital markets at Lehman, Barclays, and so forth. And so I'm going to get the lay of the land from Larry. So, Larry, thank you very much for joining us. Joe, Tracy, thanks for allowing me to join you. Really appreciate it. I'm trying to think where to start, but what do you sort of, what do you do at Cowan Company?

Describe Cowan and Company's sort of role and your role within the bank. Sure. Well, look, I'll start with Cowan as a, you know, 100 plus year old institution that really was, in some respects, reborn about 10 years ago when the old Cowan, which had been bought about two decades ago by Sochgen had been spun out and went into the financial crisis probably a little bit too small and too narrow to navigate the period of 08 and 09. and it ended up merging with a alternative asset manager, Rameas. And so the current Cowan is really about 10 years old and is a combination of the legacy of what was Rameas and what was Cowan at that point. And really over the last decade, the firm's grown enormously. And we're, but nonetheless, we're a pretty targeted institution.

We're about 1,300 people. And we focus disproportionately, although not exclusively, on the U.S. markets, and in particular on the arenas of equities, credit, and banking delivered to not only, but again, predominantly growth sectors of the economy. And in addition, we have an asset management business, which is the remnants of what was Rameas, where we also try and, as much as we can, focus on areas where we have a core strength and knowledge base, and again, it tilts more towards disruptive areas. So with your advisory hat on, I'd be really curious to hear what you've heard from clients in 2020.

So you have a really good perspective on what corporates are basically looking for, what they've experienced in a really strange year that I think was probably marked by a real sense of urgency when it came to raising funding around springtime during the worst of the market sell-off. And then we've sort of segueed into a moment where people are talking about bubbly markets, excess liquidity, sloshing in the system, and this idea that capital is sort of free and available to everyone. I'd be curious if you could give us some color on what you've seen. Well, Tracy, it's a great question and one that would take a lot longer than the podcast to answer. But I'll try and maybe pick a few core elements and then we can delve into it deeper. I think the first is that having been around the capital markets now for longer than I'd like to remember, it's always been the case that we're reminded in periods of dislocations of how strategic financing decisions of the past actually are when challenges come about in the broad economy and the capital markets in specific.

Many a time in good times, folks believe that the financing decisions are a choice for the treasurer or the assistant treasurer. It's not a boardroom kind of conversation. And that always comes to roost when we hit difficult times. And that's true whether you look back in the 70s, the late 80s around the SNL crisis, whether we look at the internet bubble, whether we look at 08, those who didn't set up their foundation with a strong, you know, think of it as a lot. you have to build the basement first, then build the first floor, then the second floor. The capital structure of a company is that basement, that first floor, the foundation. And so what we saw when we hit March and we saw the beginnings of the acknowledgement of what the pandemic might be, is many companies found themselves where either their plan on the business side was being blown up,

or maybe their business was actually going to be able to be somewhat resilient. but they were worried that the financing plan that they had set in place to help them with the business side wasn't as robust as they thought. And what am I going to do if I want to grow, I need more capital and I don't have it on hand? That was a big question that was, you know, in every boardroom in March or April. So I like to say financing is always strategic, but we're reminded of that when we hit difficult times. So we mentioned that, you know, especially the second half of 2020, sort of turned into the year of the SPAC unexpectedly, just an absolute boom, traits you mentioned it, bigger, more money through these vehicles

than I think the last 10 years combined. When from that perspective that you described, that financing decisions must be sort of like strategic to the company. What was it about this moment in particular that was like, this is the vehicle for right now? What is it on sort of the investor side, the people you saw want to put money to work in this way, that they're willing to buy into these? And what was it on the sort of the sell side that there were companies that were ready to and eager to go public through this route? Yeah, well, you know, I like the way you actually even coined the question, which is the two sides of it, which is what were the issues why people would finance the SPACs? And then why do companies sell into SPAC?

And I think that the first thing to recognize is for many folks who have not been around the capital markets, they see all of a sudden on Bloomberg, you know, all these SPACs being done. And they think that this is some kind of new creation. The reality is SPACs have been around in one form of another for more than 20 years. And if we think about Blank Check corporations, they go back, you know, you can go back to the 20s and 30s of the last. century and they were blank check companies. So like a lot of financial engineering or a lot of financial structures, the market and the technology have to align for them to become broadly utilized. And I think that's something that when we look back at 2020, the question really is, why in 2020 did they line up so well that it became commonplace? And I think that goes to this

issue of the financing is strategic question, which is that up until February of this year, I'd say most of your listeners had never heard of us back. And then something changed. And what changed was that for particularly very, very growth-oriented companies, companies that maybe in the past would have gotten their next round of funding in the private market and waited another year or two before going public. What happened was the private market ostensibly dried up. And what I'm about to say here is true, both about venture-backed opportunities, but also

it was true in the PE world. So if you look at general private equity investment, when sitting around with financial sponsors in March and April, I can tell you the one thing they weren't talking about was how they were deploying new capital. They were focused on their existing portfolio. So with that going on, if you're the CEO and the board of a company that your growth plans are potentially even taking off because maybe you have a product offering that is actually going to benefit from the pandemic. It could be disruptive consumer. It could be in things like sustainable energy or it could be in areas like energy transition where those opportunities are really unaffected or they're accelerated potentially by the,

events of what's happened in the pandemic, but you don't have the funding you need. In that scenario, all of a sudden, a privately negotiated transaction with an entity that brings capital to bear becomes very interesting. And because of a number of other developments in the 18 months prior as to how deals were getting done in the SPAC market, it allowed for a path to real capital for the companies so long as they were public market ready. And that's where the period of kind of the second quarter really changed things. What does public market ready actually mean in this context? Because again, I think Joe mentioned this in the intro, but when a lot of people hear the

words facts, they think that this is basically a way of sort of listing light. You don't have as strict disclosure requirements, and maybe you can get away with a few things like using forward earnings projections and things like that that you wouldn't be able to do if you went down the traditional IPO process? Listen, I think it's a really interesting point that as we sit here today, looking back on 20, we can say that the events of, I wouldn't just say 2020, I'd say 19 as well as we started seeing some real significant increase in direct listings. What we would say is companies that want to go public in the U.S.

now have three paths available to them. They have standard IPOs with all of the regular structures. around that, they have direct listings, and they have sale to a SPAC. And so I'll address particularly your question about sale to a SPAC, but broadly speaking, I'd say a market where there's more choices and companies can match what they feel is appropriate for them to the best path is probably a better market overall. It's a more complete market. And again, we're not here to talk about direct listings, but there are a lot of folks who are big advocates for that as well as an alternative. On this back front, I think probably the two elements that were the biggest

beneficiaries for companies thinking about going to the market that broadened it was, one, the fact that they can use forward projections. And so we have to think about the world of a company that is investing for the future that has limited cash flows today. And historically would be challenged to get that story across to the public market. And the reason it would be a challenge is they have to rely on historical numbers, which might be just investing cement in the ground or whatever it might be to build that business. And they might be a number of years away from having real cash flows or significant revenues. When you have the ability to use forward projections, and then the important part of the second piece, many of these deals, the way that they get done is,

in front of the deal being announced, the M&A deal being announced, they line up a pipe investment from a series of institutional investors. And those investors have the opportunity to look at those forward projections, to meet with management and have in-depth conversations, much more in-depth conversations than they could have in an IPO process. So if you think of it, think of the lead investors in an IPO as being similar to the lead investors in a pipe tied to a SPAC deal. The difference is there's a lot more education that goes on for that pipe investor in a SPAC than they get in an IPO process. So for a company who's forward

or their future is fairly different than maybe what their history was because of where they are in their evolution, that process allows them to raise capital from these pipe investors, which then when that's lined up, that's when they have completed the necessary requirements to sign a merger agreement, and that's when the deal gets announced. And then months later, the deal closes, and ultimately it starts to trade in the public market. That process that moves forward, that discussion with investors, comes up with what price is a clearing price and allows them to have certainty before they announce it is extraordinarily interesting to many companies. And it's not just because they can use forward projections.

It's that they minimize the many, many months of risk that's involved in a standard IPO process where when they finally go to the market, if the market's not there for them, bad timing, et cetera, they have a failed IPO. When you have this negotiated process with the SPAC and with the pipe investors that predates the merger agreement being announced, if the deal doesn't come together, the market doesn't know about it. It was never out there. You don't have all the embarrassment of an IPO getting priced at the, you know, below the range, whatever it is.

And that is an appeal to a certain percent of the corporates out there. Certainly not everyone. We still have a very robust IPO, you know, market. But for some companies, it's a better path. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen in Moscow here to tell you about our new on-demand. News Report delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio report

on the day's top stories. Episodes are published throughout the day with the latest information and data to keep you informed. Yes, there are other products like this from a variety of news organizations, but they usually rerun their radio newscasts throughout the day. That's not what we do. We create customized episodes that can only be heard on Bloomberg News Now. And we don't wait an hour to publish breaking news. When news breaks, we'll have an episode up in your podcast feed within minutes. So you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts. We're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. So, you know, it's interesting. You talk about transformative technologies, new technologies.

there have been a lot in the electric vehicle, autonomous vehicle space, vehicle tech, clean energy. Many of the companies, it's not just that the future is not going to resemble the past, it's that there's almost no present. Maybe it's just a technology still in commercialization or with revenue expected to be a few years off. You know, I'm thinking about like one of the big IPOs, for example, this year, the software company, Snowflake, which has a real business, but still being valued that sort of multiples and expectations way into the future.

Maybe someone just drew a ruler and sort of projected where their earnings are going to be in 2027 and are coming up with a multiple on that. Is there something fundamentally different? I mean, all companies are, all growth tech companies are fundamentally, you know, about the future. Is there something fundamentally different about, say, a company that has some projectable business like an enterprise software company versus a transformative, or new tech in which there's nothing really even to extrapolate yet in terms of why the SPAC route may make sense for them, whereas something is slightly more predictable and established,

the IPO route makes sense for them, like a snowflake. Yeah, I do think that you highlight an interesting point, which is, and it maybe gets a bit more to the value of the SPAC team and why when companies look to sell these days, they're often doing what has become known as in quotes a SPAC off? Yeah, I want to talk about SPAC off. Yeah, they're not necessarily responding to the first SPAC that calls them up. Yeah. And the reason for that is that you're exactly right.

If you're a company that is now getting to choose how you're going to enter the marketplace, let's just compare that the company and their board looking at selling to a SPAC to going the IPO path. one of the things they would do in an IPO path is they would think through, hmm, I probably need to bring different people onto my board as a public company than I would have when I was a private company. Maybe some of the VCs are going to come off the board and we're going to put some, you know, folks who have more public market experience onto the board. When selling to a SPAC, I can do that, I can do that by selecting a SPAC that has expertise in my area. So let's just say, for example,

I'm in one of those hyper-change arenas. I'd rather sell if I'm a financial tech company to a SPAC that has some significant fintech executives involved with it because I'm basically picking at a minimum two new board members, well, one or two depending on the structure, but two new board members for now when I'm a public company, who's going to have oversight of the company? And so one of the things that is really important is what does the SPAC bring to the table? What are the backgrounds of the folks from the SPAC who will ultimately go on my board? Maybe it's they have real good connections in the industry I'm selling to and they'll help accelerate my business.

So the decision of what SPAC will I sell to becomes very similar to what private equity fund would I sell to if I was going private or if I have a choice of growth equity funds, because I'm now doing a growth equity round in the private market, who would I want to come in to be my partner for the next five years. So think of that process of selecting a SPAC that a company sells to as who is going to be part of my oversight and part of my ecosystem to help me complete my plans. Because all these companies, what they really want to do in the public market is basically execute on their plan.

And that's why SPACs that have a lot of expertise are emerging as being, you know, honestly, better bidders than those who are just, you know, a few folks have come together to try and put some capital to work. So just on the SPAC off point, I mean, one of the things, you drew an analogy to private equity just then. One of the things we heard about private equity in the latest cycle is that targets became fewer and fewer as there was more money poured into alternative assets, as the SPAC space heats up and, you know, lots of people are setting these up and lots of people are looking for targets to merge with. How competitive is it at the moment? And, you know, like, what does a SPAC off actually look like in your experience?

Like everything else, it's almost like if you say, if you've met one family office, you've met one family office, or same could be said about private equity. Same can be said about how a company decides to run their, what's really an M&A process, which is a SPAC off. The difference is, and this is important for your listeners to understand, unlike a normal M&A process where the deal ends when the other side says, I'm willing to buy you at a price and I have a money good. In a SPAC, the capital markets decide whether that's a proper deal or not, because it has to be funded. And that's where the combination of what's known as the DSPAC, the process where the original investors in the SPACs, or at least those who are still holding it at the time a deal is announced,

they get to decide whether or not they want their money back or whether they're going to roll into the new company. And that's also where, in the moments prior to that, the pipe investors, which are generally, not only, but generally very large institutions that are public market investors, they make that decision. So you have to first think about a SPAC off is finding the right partner who can deliver two things. One, they can really help my business grow. I'm now saying mine, meaning I'm a company. And secondly, they have the credibility in the marketplace that they're going to help me get the capital that's at the end of the rainbow. The end of the rainbow is that these companies get capital via both the pipe and what's known as the DSPAC process. So when we're advising, let's say, a company on a SPAC off, we're much more focused on the

qualitative elements as opposed to the quantitative. It's almost never about the highest price because whatever the SPAC might indicate they think the value is, it is only real if it's validated by the capital markets investors via the back end. And so what's most important, important is the qualitative issues. What do they bring to the table? Do they have real insights that can add to you as a public company? Do they have credibility in the capital markets to help raise the capital? And, you know, when you move forward, will they be valuable on your board because you're going to be living with these folks on your board for a while? So just to sort of like put it all together, there's a natural reason it sounds like

why the SPAC boom is also very heavily concentrated in a lot of these sort of new energy, alternative tech type things in which money is important for them to continue their development, but also they really have sort of key strategic goals. So maybe for an enterprise software company in which the business is set, and then it's just a matter of growing it through the sales force, the SPAC, in addition to money, really brings in some strategic, alliances that are more needed to, like, get from point A to point B? I think you're right for why 2020 was, when we say it was the year of the SPAC,

or you said it actually, not me, why that's where we saw the real breakthroughs. It was those kind of businesses, you know, where there's a huge amount of investment for the payoff in the future. By the way, the deepest capital market in the world is not the private market. It's still the U.S. public market. and so getting access to that capital is helpful. And so I would agree with your thesis. I do think that's going to broaden out, though,

because I think that we're starting to see enterprise software companies that are coming down this path. I think it really depends on the nature. Anytime you see this much activity, it forces everyone to look at it. It's a little bit. I use an example, and maybe it's because I'm an old convertible bond originator

of the convertible bond market, which is, you know, over the last 30 years, there's been periods where it seemed like every company in the world was doing a convertible bond. And then there's been periods where literally there's almost no issuance for 18 months or 24 months. And the only companies that come are growth companies looking for another way to raise capital. And so I think that we should look at what's happened with SPAC says, when this settles down to a natural equilibrium, and we will find an equilibrium, it will be one of the choices facing companies that think about going public and for certain situations where they either like the certainty of the capital at a price

that comes from it. They like the corporate governance benefits of picking the board members that bring real quality. But they might not be able to get as good a set of board members if they went a natural path, particularly for smaller companies. Your typical billion dollar company coming to the market is still a relatively small company in the U.S. market today. So they they might end up with a much better board by selling to a SPAC than they would if they went to normal IPO path, raising $150 million, et cetera. So there's a lot of things in there. But we are seeing it broaden out. I would say if we think about 21, I think what will be interesting is you're going to see more companies in areas where they were willing to go the IPO path.

They would normally go and spend six months, nine months with all the process. But if they can move quicker, they can get a deal done in three months, a deal with a SPAC, they can raise more capital that way than they might by doing another private round and then coming back with the IPO in the second half, I think you're going to see that they're going to say, you know what, SPACs are more acceptable now. It's no longer a four-letter word in the negative way. And what you'll see is companies that otherwise would have done an IPO that might come to the SPAC market. Again, it's not going to diminish the benefit of the IPO process, it's just going to be another choice.

But we'll see it broadened out. On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering. The Killing of Bob Lee, beginning April 16. It's interesting that you're talking about these trends

sort of coming and going in capital markets. One of the big trends just a year or two ago was this idea that public markets were dead and that these big tech companies or these growing tech companies were going to stay in the private market forever, because why would they ever bother to IPO when they can get as much money as they want

through private fundraisings. So I'm curious, when it comes to SPACs, why bother going public at all if capital is plentiful in the private market? Yeah, that is a great question. And I think it comes back to the reflections of when you look at the abyss of March. You got my example being comparing it back to other periods of time when the market's dried up. When you're in the public capital markets, you have the deepest market available to you for raising capital. You might have to do in a difficult market, except a deeper discount to raise equity than you would in a more bullion market, but you have a marketplace where people meet every day and agree on price and size. That's just not true in the private market. The private market get, you know,

I like to say when the public market gets a cold, the private market gets the flu. You know, unfortunately, when you're dependent on the private market, it works great so long as each successive round can be done in a higher value. And the market is fairly good. If you looked at the amount of private capital that was put to work from March 1 to say the end of June, it wasn't a lot. And if you were a company that was living saying, I can wait another two years to go public because I can always keep raising money in the private market at a higher levels, when all of a sudden, that doesn't work anymore. Because since the public market's down 25%, the private market's shut,

unless you're willing to do a down round at a very, very big discount, it all of a sudden opened up eyes again to really a generation of entrepreneurs and their venture backers. Again, I say it that way because a lot of folks who are running venture capital funds and entrepreneurs that they were in high school in, you know, 2008. They don't remember the challenges of a very difficult market. So I think it may remind them of, wow, the public market really does have a value. It's there to be the place where folks who want to transact in the deepest pool of capital in the world get to transact on a daily

basis. And so I do think that you can't separate that from what happened in 2020. And that's why SPACs have taken off again. It's also where you're seeing more companies go public. Look, you mentioned snowflake before. And again, I don't want to speak about particular companies. Sure. I think there's something to be said about why are all these very large tech companies coming to public now? Well, because at some point, your investors need liquidity. You know, the average venture capital company, if you look back a decade ago, tended to have a monetization event, usually around seven to ten years. What's happened post the financial crisis is it's stretched out to 10 or 12 years. That's a long time for venture capitalists to have their money locked up.

It's a long time for the founders, the employees they've hired, to not have monetization. And so what we're seeing is it's not that they don't go public. They just waited three or four more years because they could. But they ultimately are either going to be sold or come to the public market because at some point, the folks who risk capital a decade ago need to get that capital redeployed. And so I think we're in a period of growth of public companies for the first time since, you know, maybe go back to Sarbanes-Oxley, you know, for the first time since that. I also think it's why you're seeing the advent of the private exchange market, where we're seeing, you know, a lot more activity where companies are allowing their historical investors to trade in

a secondary market privately, pre-IPO, because they recognize that 10 years is a long time for people to keep their capital tied up. So all that leads to this symbiotic relationship between private capital for the early stage and then ultimately going to the public market when it's a more established company. I mean, you make a compelling case that a public markets are the sort of deepest pool of liquidity when companies need it, that there are a lot of companies who 10 years ago got their first private funding, and it's now time for them to realize some of that. Just cynically, though, it certainly seems like, and I hate, I won't use the word bubble, but it certainly seems like valuations on public markets not only are high by historical

measures of other public markets, but that the companies going public are enjoying a pretty nice premium from their last private market valuations in many of these cases. And so I'm curious if there is, to what extent, is some of this re-equitization, the re-expansion of public market, just sort of a recognition that if you have a good asset, if you have a company that's private or something like that, there's a decent chance that you can get a higher valuation right now on public market. Yeah. There's no question that all else constant, right? If you, if you had an academic finance professor on, they'd say the same company, Private versus public should always trade a higher value in the public market. Because the private market, I have to have a discount for the fact that I can't get liquidity when I want it on a regular basis. So there's no question that this is true many times. Today, I think it's even more true.

But I'm not so sure it's as much about where the institutions live as I think one of the things that we're seeing is particularly for hypergrowth companies or the opportunity for real growth. in areas that are transformative, I do think that we're seeing a generational shift. We're seeing many of these businesses. And this is true, whether it be existing public companies, whether it be companies that go to the public market, be an IPO, direct listing or SPACs, that in some respect, the quote unquote, Robin Hood investors often are taking over the stocks for some period. And that dynamic where investors who are looking for that next great investment theme are coming in and buying these stocks, they are often bidding them to levels that, broadly speaking, neither the research analysts nor the institutional investors seem to be fully agreeing with those valuations. And that happens in a market when there's a lot of growth. we've seen it before and those stories tend to retreat after that buying is exhausted.

And we've seen some of that in 20. I think we'll see more of that in 21 as, you know, newer investors decide to come in in the aftermarket without necessarily having all the research and knowledge of what the right valuation should be. Now, those folks are not, they're not involved in the IPO, not involved in the initial setting of values. They come in the aftermarket. And again, you know, that's part of, you know, the market.

marketplace. So, Larry, I mean, one of the things that you mentioned early on is that now investors kind of have three distinct routes to going public. There's the traditional IPO, or sorry, companies have three distinct routes to go in public. There's the traditional IPO. There's the SPAC. And then there's the direct listing. And we talked about this on an earlier episode, but it looks like regulations will allow such that companies could actually raise money through direct listings so that they cannot only come public and get liquidity, but actually get cash for the new cash, which they couldn't previously do. And then you have like a lot of like long time sort of Silicon Valley types, super critical of the traditional IPO, the cut that banks get,

the premium, the so-called money left on the table. What do you see is the future of the traditional IPO. Is it necessarily going to survive? And for what kinds of companies does it make the most sense if there are these other either faster or cheaper routes to going public? Well, again, I do think that you should actually do a separate podcast just on that question. Yeah, I know, I know. Even the cheap. We could have you back if you want. We could just even the concept of cheaper is something you have to think about because, you know, on a direct listing is an advisory fee that would be paid on the entire value of the company, whereas the IPO fee is only paid on the amount of shares that are sold in the marketplace. And so, again, I'll leave that

to the academics because I think there's an argument that at times the expenses are actually very similar. I think the biggest issue I would just raise, I'll even add a fourth path that some companies will take, which is there's also reverse mergers that have been around forever, where a company ends up bringing with them capital and buys an existing entity, and now they go public that way. So listen, I think that the most important thing, and this is where I do, I may not agree with all the perspectives every loud investor might raise about direct listing versus this, versus that.

But I think that by having choices that a company can determine what they want with their boards, they make the most informed decisions for where they are. So companies, for example, that are not necessarily going to be $20 billion companies on day they know that they need to have a real following. As I would have said back in my Converbal Bond days, you know, where the bond needs to be sold, it's not just bought. In those situations, lining up, you know, research analysts that really understand the story, having, you know, a road show to meet with, you know, dozens and dozens of investors to build

up that interest for that to have a successful launch as a public company, that's still true for most companies. You know, the majority of companies that come public are not at $10 billion valuations. They're companies that maybe they're $750 or a billion or a billion and a half. And those companies require having significant interest in order for them to be able to be stable public companies. And so the IPO path or a variant of that, maybe with a SPAC where they have a pipe attached and they can do a deep roadshow with investors, I think that's still going to be where the majority of companies that want to go public come through. but the direct listings work for certain entities. And, again, it's why there's chocolate and vanilla.

The last thing I think that I'd want to share as part of a 20 look back in the capital markets is just, I do think that, and we talked about a little bit when we talked about some of the sustainable stories that came to market. I don't think we should overlook that 2020, I think, will be viewed for the capital markets as the year that sustainability or sustainable investments came to the market in a real way. And I think when we look back 10 years from now and say all the awful things about the pandemic and, you know, the enormous challenges society faced on a lot of fronts, one of the the real positives will be that stories that were focused on solving some of, you know, the,

globe's biggest problems, were able to get funded and that more and more investors and investors are looking to put capital to work in funds that invest in sustainable opportunities. And so it's not lost on me, at least, that 2020 was a year for that. Maybe it's because we got reminded of how interconnected we all are. But I think it's a great thing that stories that do everything from sustainable farming to energy transition to solving lots of other problems around, you know, the limited resources we have are getting funded in the private and the public market in a way that just wasn't happening in 1819 in a deep way. And so I, I hope that, you know, we'll find that the 20s is a decade of these great ideas that hopefully

will become key parts of becoming energy independent and all those things, you know, that we'll look back at 2020 as the turning point for that. Larry, this was really appreciate you joining us. Maybe we'll just have you back in a few weeks to talk about IPOs, or maybe in a year or something, but you're sort of a breadth of knowledge on this and your insight super helpful. and clearing up a lot of questions that I think both Tracy and I had. Well, it was my pleasure, and hopefully we have a healthier 2021. Let's just say that.

Yeah, indeed. Nothing's more in our mind than that. So anyway. Without question. All right, thanks, Larry. Thanks. Thanks so much, Larry. Cheers.

Tracy, I found that super helpful. You know, I do think that for a long time throughout last year, and I guess, maybe still am a little bit like what's really the deal with like spacks like is it really a good vehicle how much of it is just about getting that pop or finding some sexy story that you can flip to robin hood investors or whatever but i'm starting to buy the idea that it is a reasonable um a a reasonable vehicle for a lot of companies that's probably going to be with us to stay for a lot. I'm going to reserve judgment for at least one economic cycle and see what happens. I will say, I will say when Bark Box announced that it was going public through a SPAC, most of the commentary I saw

about that just was talking about pets.com and the sort of 2000s internet bubble. That was the first thing that people were talking about. But Larry did make this interesting point about how certain capital market structures tend to become trendy at certain times. And I do, you do see that in 2020, this idea of trying to escape market volatility or the uncertainty of an IPO process by going the SPAC route. That's certainly the case. But I guess my question is, as things start to normalize in 2021, are SPACs going to not be as popular as they were last year? Right. I mean, I think that was actually probably what helped me the most because I still, I was not satisfied or I still like, it was like the why now question because it's like, okay, you can lay out a list of arguments for why for a lot of companies. The SPAC route makes sense. But I was still hung up for a long time. I was like, yeah, but why now? What was it about 2020 in particular that caused this to catch fire? And I think Larry did a good job. and help me, at least to some extent, understand what it was about this moment.

I mean, there was obviously a lot of appetite for sort of new technology, transformational tech. There was the market volatility of the moment that maybe made traditional IPO roads, IPO routes or too long, too much of a long cycle. The need for public market liquidity, his analogy about, You know, it's like when the public market gets a cold, the private market gets a fluid. And so just wanting to have that public market currency. So I can start to see from that conversation why a number of things sort of did come together in that moment to produce what turned out to be a pretty extraordinary year. Like I wouldn't have guessed it, obviously, going back in the spring.

But there's enough sort of moving parts that I can say, okay, I can sort of, this makes sense why it happened. Yeah, I guess the question is whether or not that experience of early 2020 is so ingrained that companies will always consider SPACs as a financing option. Like one of the many things they can pull off the shelf, one of the many options forever or whether it's sort of like this one-time thing. I guess it gets back to Larry's point about how capital decisions are. They should be strategic, right? But I think often, like, people don't really, sorry, I can't talk today. They should be strategic, but I think often people tend to make a shorter term decision. So they might just be jumping on the SPAC bandwagon rather than actually thinking it through. Basically,

I'm saying I'm unsure whether or not, never mind, cut the basically I'm saying thing. No, but I get what you're saying. It makes a lot of sense. You know, I do think. broadly, and this is a topic that we have to come back to. Like, we have to talk about what is the future of the traditional IPO, because there have been assailed by critics for a long time. Lots of critics of the pop and the implication that the company is leaving a lot of money on the table with this big gap. Lots of critics of the pricing, paying underwriters. Yeah, paying underwriters. You know, I'm also curious whether things like Roadshow or educating analysts is as important in a world in which we have the internet and can learn about companies through all different

kinds of ways. And we have sort of amateur analysts on Twitter and then their newsletter who don't learn about a company through the traditional routes. How much that is intermediating the need for the traditional road show. So I think this should be a big topic for us this year. Yeah, for sure. I sense an IPO series coming on. Oh, yeah. I love that. And also, you know, Also, just the, you know, we did that episode in the past about direct listings. They have since gotten approval, I think. So I think there's the total green light for direct listings with a capital raise. It'll be super interesting to see what companies, when presented with that option, how many of them go down that route.

And lots to talk about. Yeah, I think there's definitely enough going on to have a series. All right. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Jill Wisenthall. You can follow me on Twitter at The Stallwart. Follow our producer, Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levy at Francesca Today. And check out all of our podcasts under the handle at podcasts. Thanks for listening. I'm June Grosso, inviting you to join me for the Bloomberg Law Podcast.

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