4 ms·

TK Finance Dictionary: “SPAC”

55 points by garraeth 6y ago

aminozuur 6y ago
Good article. Can't believe I'm saying this but I wish the title was slightly more clickbaity. I shared it with my friends, I hope they click to read.
- ashalhashim 6y ago
  The title of this post in his newsletter was “Financial Devil’s Dictionary.” Wonder why he changed it.
  - edoceo 6y ago
    Yea, that's loads better.
vmception 6y ago
> America still leads the world in one thing: inflating speculative bubbles using gibberish finance acronyms In my experience, in the rest of the world people from all walks of life get caught up in the even greater gibberish financial terms for financial products that don't even exist in the described form. In the commodities space it is at its peak. The biggest offender is the "SBLC", which in reality is simply where a bank acts as a guarantor and underwriter, but in the joker broker network (aka 99% of the commodities sector), an SBLC is a freely tradable security that can be used in lieu of cash. There are people that think they have received these unicorn SBLCs (pieces of paper and forgeries of bank letter heads) and simply haven't tried to deposit them yet. And there are orders of magnitude of more people that think they are engaged in the trade of SBLCs or that they exist in this form. The real existence of the term makes it harder to cut through the disinformation.
dan-robertson 6y ago
Meh. SPACs have a pretty simple purpose: allowing companies to IPO without it officially being an IPO (eg much less disclosure for example). For the companies they can avoid the risk of the IPO. If wework had gone public via SPAC they would have actually gone public (although wework looked pretty bullshit even before everyone stopped wanting so much office space) and not just been a big embarrassment. I think it’s also popular for VCs to not like IPOs at the moment (if the price goes down that’s bad. If the price goes up they’ve been ripped off in the investment they got. At the moment it seems newly public stock is in high demand so every IPO feels like a rip-off.) Maybe they like SPACs better. For investors a SPAC exposes them to the IPO pop: like the investors in an IPO, the SPAC reduces the risk of going public to the company and they expect to get paid for that by getting stock slightly cheaper than they expect; but those investors also get optionality when the deal is announced. Ordinarily small investors wouldn’t get the chance to participate in IPOs. For the managers they get massive payouts, even bigger than investment banks get for IPOs. Maybe those will go down if SPACs become popular and mature and competitive. (Though note that there are some incentives for managers to get a good deal.) And probably there are lots of people enjoying and getting money out of trying to figure out how to price shares in SPACs and the warrants, especially while there is a lot of variety. Maybe you think SPACs are great or maybe you think they’re cheating regulations or siphoning off money to rich bankers or random celebrities and should be made illegal. There are some economic reasons to expect a SPAC share to be worth more than the investment it corresponds to, and there are social reasons to be wary of SPACs. I don’t think the article does a great job of discussing either.
- ketamine__ 6y ago
  There are lots of great companies out there that are increasing earnings every year. No need to invest in this crap.
- fennecfoxen 6y ago
  > If wework had gone public via SPAC they would have actually gone public (although wework looked pretty bullshit even before everyone stopped wanting so much office space) and not just been a big embarrassment. Funny you mention it; WeWork is in talks to be acquired by SPAC BowX, though it might also depend on SoftBank talking Adam Neumann into taking a $500 million haircut: https://www.wsj.com/articles/wework-co-founder-adam-neumann-nears-settlement-with-softbank-11614033832 https://www.wsj.com/articles/wework-co-founder-adam-neumann-...
- xwolfi 6y ago
  Small investors can participate in IPO where regulation allows it (so vote for that). Here in Hong Kong, every grandma rushes to the bank at every IPO to stuff her pocket with pre-allocated retail blocks of 1 to 10k USD. Do you want your grandma to do this ? You can vote for it, but be ready for what it means. For me what it means is that the "poor little small investor" is a fallacy, most small investors are retired landlords/rent earners, not struggling productive young people and giving more leeway to retail investor just make old people either consolidate more or risk more when they rely on high cost of survival. Fine, but be ready to see none of the young people invest in IPO because they earn a salary or don't have a capital large enough, and a LOT of the whiny old fucks lose all their savings and vote pro-China to spite you :D SPAC are a travesty imho, we do it often in Hong Kong too, because why not be creative if it can also give you the pleasure of bypassing regulation, hiding that your Chinese forestry company never saw a forest or whatever, but frankly I don't see any social or financial value. You ask for public money, you give public information, it was the first commandment of capitalism... As for the banks' commission, it's well deserved and usually a function of the volume they bring via marketing. I suppose you could bypass the banks in an IPO by building a small department in your company doing just that, but good luck calling people you made rich 10 times over to sell them the next unicorn. People will just scoff at you selling your own crap. It's like being a restaurant with a 10x increase in orders from foodpanda whining about their awful commission rate. Fine, do it and see or figure a way to make margins with it anyway.
ibeckermayer 6y ago
Fact is that under the current system, once you make it to the top there are a whole myriad of ways for you to rake in more money than the average person will ever see in their entire lives, year over year, while producing next to zero genuine value for society. In this case, the SPAC can be seen as regulatory arbitrage that’s taking advantage of the Tower of Babel of regulations around raising money from non-accredited (read, non-millionaire/politically-connected) investors. This fact is what makes the typical framing of the “should billionaires exist?” debate so asinine. Do “Billionaires Build” [1] as PG claims they do? Sure, some do, and in particular the ones he comes into contact with. But under the current system, it’s also often the case that Billionaires Built, and now Billionaire Grifts; Billionaire Lobbies; sometimes Billionaire Basically Never Did Shit Besides Wield Political Influence. And this applies to lesser-yet-still-extremely-high degrees of wealth, too. Even if your average Trump supporter or socialist college protestor can’t detail the precise mechanism of this injustice, they can smell the stench emanating from this swamp of undue privilege. The recent wallstreetbets uprising was a more knowledgeable reaction against this breed of arbitrary self-dealing. [1] http://www.paulgraham.com/ace.html http://www.paulgraham.com/ace.html
- kelnos 6y ago
  Non-accredited investors do not sponsor SPACs. Sure, they can get in after the SPAC goes public (since it's publicly traded just like every other public company), but I see this as a way for retail investors to get in on sorta-IPOs if they want to (which they otherwise cannot do). If people are investing in random companies they heard about on Twitter or RobinHood's trending list, whether it's a SPAC or company that went public in the traditional manner doesn't matter much. But if people actually do their homework and do at least some cursory research into the companies they invest in[0], then SPACs give them an option they didn't really have before[1], that they might want to make an educated bet on. Or not! It's up to them. [0] Hell, most people (myself included) shouldn't even be investing in individual companies, at least not without money they are fully prepared to lose (or at best just grow slower than inflation). [1] Well, SPACs aren't new, so they had that option for a long time, but they weren't quite as popular as they are now, so there's more variety.
  - 6y ago
nonameiguess 6y ago
Okay, the Paul Ryan SPAC is frickin' hilarious. "Please give me a bunch of money and I promise I'll invest it in something. Don't know what yet."
vmception 6y ago
>Sponsors are paid in “founder shares,” bought at a discount and usually amounting to 20% of the common stock of the future company Can someone explain the flow of this transaction to me? So this 20% is from the capital raised and used to buy 20% of the acquired companies shares at a discount and then given to the sponsors? Or is it something else. Also I thought there was a management fee too, like 2%, similar to PE and Hedge Funds. Which is decent money for sitting on it for 18 - 24 months.
- edoceo 6y ago
  Company "worth" 10M. They buy $2M "worth" of shares for $1.5M. Acquire company, now "worth" $50M and liquid. Profit. (Numbers just for example)
  - vmception 6y ago
    ah okay, sounds like something I would do while there isn't price discovery. I often times go steeper (how about $1 for the whole grant) so people can afford the 83(b) election to buy the underlying asset and have it just sitting as capital gains instead of ordinary income, it turns out the vesting period for restricted units is not regulated at all while giving you all the capability to play around with discounts and elections.
- Lazare 6y ago
  The 20% works like this: You create a SPAC with, say, 10 million shares. You sell 8m shares to the public for $10 each, and 2m shares are given (technically, sold, but for some nominal sum like $25k) to you as the sponsor. Now the SPAC is just a box containing $80m dollars (well, actually, significantly less than $80m due to all the bank fees, but let's pretend). Since their are 10m shares, each share is backed by an average of $8 of cash, and you personally own 2m shares backed by $16m of cash. Matt Levine runs through a lot of the math here in his "SPAC Magic Isn't Free" column (https://www.bloomberg.com/opinion/articles/2021-01-08/spac-magic-isn-t-free https://www.bloomberg.com/opinion/articles/2021-01-08/spac-m...)
  - 6y ago
kelnos 6y ago
Ugh, c'mon. I mean, there's plenty of weird garbage in finance that it's entirely reasonable to throw shade at. SPACs aren't really one of them. The SPAC itself has to do its own IPO, and has to disclose what it plans to do. And if you decide to read those disclosures and they say that they're going to use the money to buy whatever company they feel like in whatever industry strikes their fancy after they've been smoking pot continuously for 72 hours, then that's your choice; you can also light your money on fire if that's your thing. But maybe you should pick one where the managers have an investing philosophy aligned with yours, and who plan to use the money in narrower ways that you agree with? Obviously you don't get as much information about the business (because there isn't one yet) as you do in a traditional IPO. But so what? If you're investing in a SPAC you're saying that you have a chunk of money that you want to invest, and that you trust the SPAC's managers to find a good way to invest it better than you'd do on your own. And that's not at all a weird thing to do. It's not significantly different from giving your money to a hedge fund or VC fund, or (as a retail investor) investing in an actively-managed mutual fund or ETF (which are maybe things that most retail investors shouldn't do, but still have the option to do if they want to). This is just not a big deal. You can simply choose not to invest in SPACs if you don't like them. The IPO market is generally closed to your average retail investor anyway, so having fewer conventional IPOs doesn't really affect retail investors. (SPACs are publicly-traded before the reverse-merger, though, so if a retail investor does really want in, they can do that, with shares usually trading pretty close to the original $10 price until acquisition rumors start flying.) Regardless, my sympathy for people who throw money they can't afford to lose at other people without doing their homework is at an all-time low. SPACs aren't going to cause the next dot-com crash, or the next Great Financial Crisis, or whatever. They may be in a bit of a bubble, and they may start to decline (and hard) in less than a year, but it'll barely be a blip.
timwaagh 6y ago
Warning: just started investing. I don't know all that much. The popularity of spacs is because actual speculation being hard. I just do not know whether Unilever or another established company will make a bigger profit next year. Unless you have really specialized knowledge you don't know that and have little chance of predicting it. But I do know often exciting new companies go up in the months after it gets listed. Being on this forum for long taught me that much. So now that I have started investing, that's what I'm gambling on. Whether a company goes public through spac, direct listing or ipo doesn't matter so much. Spacs make it easier for me to get in early when things are still speculative, institutions haven't bought yet and not everything is already priced in. There are also many to choose from and of some it is already out what they will merge with. There are good resources to get a feel for the spac landscape. I hope this strategy will make me some money while putting my capital to work at the forefront of societal change. I'm liking spacs a lot more than established companies and large cap corps that I'd otherwise try to speculate on have also the downside that they are the reason monkeys beat the index: they don't return as much. So spacs it is.
ralph84 6y ago
Unless you're a really shitty company or a fraud I still don't see many cases where selling to a SPAC gives a better exit than going public or selling to a strategic acquirer who'd be willing to pay more due to synergies and/or eliminating a competitive threat. Having celebrities associated with the company has some value, but not 20%-of-the-equity-value.

55 points by garraeth 6y ago

Good article. Can't believe I'm saying this but I wish the title was slightly more clickbaity. I shared it with my friends, I hope they click to read.

ashalhashim 6y ago
The title of this post in his newsletter was “Financial Devil’s Dictionary.” Wonder why he changed it.
- edoceo 6y ago
  Yea, that's loads better.

vmception 6y ago

> America still leads the world in one thing: inflating speculative bubbles using gibberish finance acronyms In my experience, in the rest of the world people from all walks of life get caught up in the even greater gibberish financial terms for financial products that don't even exist in the described form. In the commodities space it is at its peak. The biggest offender is the "SBLC", which in reality is simply where a bank acts as a guarantor and underwriter, but in the joker broker network (aka 99% of the commodities sector), an SBLC is a freely tradable security that can be used in lieu of cash. There are people that think they have received these unicorn SBLCs (pieces of paper and forgeries of bank letter heads) and simply haven't tried to deposit them yet. And there are orders of magnitude of more people that think they are engaged in the trade of SBLCs or that they exist in this form. The real existence of the term makes it harder to cut through the disinformation.

dan-robertson 6y ago

Meh. SPACs have a pretty simple purpose: allowing companies to IPO without it officially being an IPO (eg much less disclosure for example). For the companies they can avoid the risk of the IPO. If wework had gone public via SPAC they would have actually gone public (although wework looked pretty bullshit even before everyone stopped wanting so much office space) and not just been a big embarrassment. I think it’s also popular for VCs to not like IPOs at the moment (if the price goes down that’s bad. If the price goes up they’ve been ripped off in the investment they got. At the moment it seems newly public stock is in high demand so every IPO feels like a rip-off.) Maybe they like SPACs better. For investors a SPAC exposes them to the IPO pop: like the investors in an IPO, the SPAC reduces the risk of going public to the company and they expect to get paid for that by getting stock slightly cheaper than they expect; but those investors also get optionality when the deal is announced. Ordinarily small investors wouldn’t get the chance to participate in IPOs. For the managers they get massive payouts, even bigger than investment banks get for IPOs. Maybe those will go down if SPACs become popular and mature and competitive. (Though note that there are some incentives for managers to get a good deal.) And probably there are lots of people enjoying and getting money out of trying to figure out how to price shares in SPACs and the warrants, especially while there is a lot of variety. Maybe you think SPACs are great or maybe you think they’re cheating regulations or siphoning off money to rich bankers or random celebrities and should be made illegal. There are some economic reasons to expect a SPAC share to be worth more than the investment it corresponds to, and there are social reasons to be wary of SPACs. I don’t think the article does a great job of discussing either.

ketamine__ 6y ago
There are lots of great companies out there that are increasing earnings every year. No need to invest in this crap.
fennecfoxen 6y ago
> If wework had gone public via SPAC they would have actually gone public (although wework looked pretty bullshit even before everyone stopped wanting so much office space) and not just been a big embarrassment. Funny you mention it; WeWork is in talks to be acquired by SPAC BowX, though it might also depend on SoftBank talking Adam Neumann into taking a $500 million haircut: https://www.wsj.com/articles/wework-co-founder-adam-neumann-nears-settlement-with-softbank-11614033832 https://www.wsj.com/articles/wework-co-founder-adam-neumann-...
xwolfi 6y ago
Small investors can participate in IPO where regulation allows it (so vote for that). Here in Hong Kong, every grandma rushes to the bank at every IPO to stuff her pocket with pre-allocated retail blocks of 1 to 10k USD. Do you want your grandma to do this ? You can vote for it, but be ready for what it means. For me what it means is that the "poor little small investor" is a fallacy, most small investors are retired landlords/rent earners, not struggling productive young people and giving more leeway to retail investor just make old people either consolidate more or risk more when they rely on high cost of survival. Fine, but be ready to see none of the young people invest in IPO because they earn a salary or don't have a capital large enough, and a LOT of the whiny old fucks lose all their savings and vote pro-China to spite you :D SPAC are a travesty imho, we do it often in Hong Kong too, because why not be creative if it can also give you the pleasure of bypassing regulation, hiding that your Chinese forestry company never saw a forest or whatever, but frankly I don't see any social or financial value. You ask for public money, you give public information, it was the first commandment of capitalism... As for the banks' commission, it's well deserved and usually a function of the volume they bring via marketing. I suppose you could bypass the banks in an IPO by building a small department in your company doing just that, but good luck calling people you made rich 10 times over to sell them the next unicorn. People will just scoff at you selling your own crap. It's like being a restaurant with a 10x increase in orders from foodpanda whining about their awful commission rate. Fine, do it and see or figure a way to make margins with it anyway.

ibeckermayer 6y ago

Fact is that under the current system, once you make it to the top there are a whole myriad of ways for you to rake in more money than the average person will ever see in their entire lives, year over year, while producing next to zero genuine value for society. In this case, the SPAC can be seen as regulatory arbitrage that’s taking advantage of the Tower of Babel of regulations around raising money from non-accredited (read, non-millionaire/politically-connected) investors. This fact is what makes the typical framing of the “should billionaires exist?” debate so asinine. Do “Billionaires Build” [1] as PG claims they do? Sure, some do, and in particular the ones he comes into contact with. But under the current system, it’s also often the case that Billionaires Built, and now Billionaire Grifts; Billionaire Lobbies; sometimes Billionaire Basically Never Did Shit Besides Wield Political Influence. And this applies to lesser-yet-still-extremely-high degrees of wealth, too. Even if your average Trump supporter or socialist college protestor can’t detail the precise mechanism of this injustice, they can smell the stench emanating from this swamp of undue privilege. The recent wallstreetbets uprising was a more knowledgeable reaction against this breed of arbitrary self-dealing. [1] http://www.paulgraham.com/ace.html http://www.paulgraham.com/ace.html

kelnos 6y ago
Non-accredited investors do not sponsor SPACs. Sure, they can get in after the SPAC goes public (since it's publicly traded just like every other public company), but I see this as a way for retail investors to get in on sorta-IPOs if they want to (which they otherwise cannot do). If people are investing in random companies they heard about on Twitter or RobinHood's trending list, whether it's a SPAC or company that went public in the traditional manner doesn't matter much. But if people actually do their homework and do at least some cursory research into the companies they invest in[0], then SPACs give them an option they didn't really have before[1], that they might want to make an educated bet on. Or not! It's up to them. [0] Hell, most people (myself included) shouldn't even be investing in individual companies, at least not without money they are fully prepared to lose (or at best just grow slower than inflation). [1] Well, SPACs aren't new, so they had that option for a long time, but they weren't quite as popular as they are now, so there's more variety.
- 6y ago

nonameiguess 6y ago

Okay, the Paul Ryan SPAC is frickin' hilarious. "Please give me a bunch of money and I promise I'll invest it in something. Don't know what yet."

vmception 6y ago

>Sponsors are paid in “founder shares,” bought at a discount and usually amounting to 20% of the common stock of the future company Can someone explain the flow of this transaction to me? So this 20% is from the capital raised and used to buy 20% of the acquired companies shares at a discount and then given to the sponsors? Or is it something else. Also I thought there was a management fee too, like 2%, similar to PE and Hedge Funds. Which is decent money for sitting on it for 18 - 24 months.

edoceo 6y ago
Company "worth" 10M. They buy $2M "worth" of shares for $1.5M. Acquire company, now "worth" $50M and liquid. Profit. (Numbers just for example)
- vmception 6y ago
  ah okay, sounds like something I would do while there isn't price discovery. I often times go steeper (how about $1 for the whole grant) so people can afford the 83(b) election to buy the underlying asset and have it just sitting as capital gains instead of ordinary income, it turns out the vesting period for restricted units is not regulated at all while giving you all the capability to play around with discounts and elections.
Lazare 6y ago
The 20% works like this: You create a SPAC with, say, 10 million shares. You sell 8m shares to the public for $10 each, and 2m shares are given (technically, sold, but for some nominal sum like $25k) to you as the sponsor. Now the SPAC is just a box containing $80m dollars (well, actually, significantly less than $80m due to all the bank fees, but let's pretend). Since their are 10m shares, each share is backed by an average of $8 of cash, and you personally own 2m shares backed by $16m of cash. Matt Levine runs through a lot of the math here in his "SPAC Magic Isn't Free" column (https://www.bloomberg.com/opinion/articles/2021-01-08/spac-magic-isn-t-free https://www.bloomberg.com/opinion/articles/2021-01-08/spac-m...)
- 6y ago

kelnos 6y ago

Ugh, c'mon. I mean, there's plenty of weird garbage in finance that it's entirely reasonable to throw shade at. SPACs aren't really one of them. The SPAC itself has to do its own IPO, and has to disclose what it plans to do. And if you decide to read those disclosures and they say that they're going to use the money to buy whatever company they feel like in whatever industry strikes their fancy after they've been smoking pot continuously for 72 hours, then that's your choice; you can also light your money on fire if that's your thing. But maybe you should pick one where the managers have an investing philosophy aligned with yours, and who plan to use the money in narrower ways that you agree with? Obviously you don't get as much information about the business (because there isn't one yet) as you do in a traditional IPO. But so what? If you're investing in a SPAC you're saying that you have a chunk of money that you want to invest, and that you trust the SPAC's managers to find a good way to invest it better than you'd do on your own. And that's not at all a weird thing to do. It's not significantly different from giving your money to a hedge fund or VC fund, or (as a retail investor) investing in an actively-managed mutual fund or ETF (which are maybe things that most retail investors shouldn't do, but still have the option to do if they want to). This is just not a big deal. You can simply choose not to invest in SPACs if you don't like them. The IPO market is generally closed to your average retail investor anyway, so having fewer conventional IPOs doesn't really affect retail investors. (SPACs are publicly-traded before the reverse-merger, though, so if a retail investor does really want in, they can do that, with shares usually trading pretty close to the original $10 price until acquisition rumors start flying.) Regardless, my sympathy for people who throw money they can't afford to lose at other people without doing their homework is at an all-time low. SPACs aren't going to cause the next dot-com crash, or the next Great Financial Crisis, or whatever. They may be in a bit of a bubble, and they may start to decline (and hard) in less than a year, but it'll barely be a blip.

timwaagh 6y ago

Warning: just started investing. I don't know all that much. The popularity of spacs is because actual speculation being hard. I just do not know whether Unilever or another established company will make a bigger profit next year. Unless you have really specialized knowledge you don't know that and have little chance of predicting it. But I do know often exciting new companies go up in the months after it gets listed. Being on this forum for long taught me that much. So now that I have started investing, that's what I'm gambling on. Whether a company goes public through spac, direct listing or ipo doesn't matter so much. Spacs make it easier for me to get in early when things are still speculative, institutions haven't bought yet and not everything is already priced in. There are also many to choose from and of some it is already out what they will merge with. There are good resources to get a feel for the spac landscape. I hope this strategy will make me some money while putting my capital to work at the forefront of societal change. I'm liking spacs a lot more than established companies and large cap corps that I'd otherwise try to speculate on have also the downside that they are the reason monkeys beat the index: they don't return as much. So spacs it is.

ralph84 6y ago

Unless you're a really shitty company or a fraud I still don't see many cases where selling to a SPAC gives a better exit than going public or selling to a strategic acquirer who'd be willing to pay more due to synergies and/or eliminating a competitive threat. Having celebrities associated with the company has some value, but not 20%-of-the-equity-value.