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The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

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Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#31

Post by vmception »

danaris wrote: post #27
vmception wrote: post #19

From my adventures in finance, I notice that nobody really understand what the experience is like for the issuer. All the perspectives are about the secondary market. SPACs: great for issuers Crypto: great for issuers NFTs: great for issuers IPOs: great for issuers Direct Listings: decent for issuers Bonds: AMAZING for issuers Be an issuer. Concepts become a lot more obvious alot faster when you think "what do the is…

> Be an issuer Great advice, if you've got a spare few tens of millions of dollars.

Depends on what you are issuing.

Either way, just remember its an option sometime after you cover your basic finances. It doesnt have to all be a larger stock portfolio to eventually make a downpayment on a 30-year mortgage. You might actually have enough capital to play the real game

Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#32

Post by lmm »

rexreed wrote: post #20
lmm wrote: post #14

Earlier quoted context omitted.

Every deal is different, 80% of a share in a good company is worth a lot more than 95% of a share in a bad company. If it's an extremely marginal case then the sponsor shrinking their cut might be the difference between the retail investors pulling out or not, so in that case you might see it happen, but most of the time negotiating the acquisition and the PiPE is the hard part, and if you succeed at that then the de…

What defines "good" and "bad"? From the market perspective "good" would be defined by its medium to long-term return to the investor that holds for a long enough period to cover the short-term loss. Whereas "bad" would be an acquisition that has declining value over time, even if its short-term performance is acceptable.

I mean just in terms of value when the merger actually closes, the SPAC equivalent of the IPO price.

Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#33

Post by seibelj »

rexreed wrote: post #23
vmception wrote: post #22

Earlier quoted context omitted.

The person/group that creates the project, and originally sells the asset. One complication would be that in a SPAC that would be the SPAC sponsor, as well as the target company's founders or preferred investors. It being a practical matter depends on how much capital you have.

So what's to stop a VC firm from juicing the returns they provide their own limited partners by simply standing up a series of SPACs which they in turn use IPO proceeds to acquire some of their own poorly performing companies that couldn't get acquired or go public on their own, while also enjoying the 20% "promote" that sponsors get?

There is not supposed to be any prior relationship between the SPAC's sponsors and the company being acquired. I believe it violates SEC rules. So the VC shouldn't be able to set up SPACs specifically for acquiring their own companies.

Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#34

Post by [deleted] »

vmception wrote: post #19

From my adventures in finance, I notice that nobody really understand what the experience is like for the issuer. All the perspectives are about the secondary market. SPACs: great for issuers Crypto: great for issuers NFTs: great for issuers IPOs: great for issuers Direct Listings: decent for issuers Bonds: AMAZING for issuers Be an issuer. Concepts become a lot more obvious alot faster when you think "what do the is…

[deleted]

Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#35

Post by jldugger »

vmception wrote: post #30
HFguy wrote: post #28

Earlier quoted context omitted.

Why do you think bonds are an especially good deal for the issuer? Even more than SPACS? What kind of bonds are you referring to? Gov or Corp?

Both. But only for the credit worthy, which is determined by the market. They all rely on new money from investors to pay back the old one. There is a word for that, but it doesn't matter. The investors rely on assurances that their investment could be paid back from other sources. In practice though they just use new debt from new investors to payoff the old one to old investors. The remaining proceeds can and are u…

> In practice though they just use new debt from new investors to payoff the old one to old investors.

One particularly interesting idea I've heard bandied about is to eliminate the rollover risk this represents by allowing the issue of perpetuities. Obviously repayment risk remains, as Evergrande currently reminds us.

Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#36

Post by chii »

BbzzbB wrote: post #24
cl42 wrote: post #4

For those investing in public equities: I personally believe some SPACs are definitely worth it in the long run. SPACs suffering on the public markets are a great opportunity to make long-term investments if you are very, very careful and wait a bit longer than most to jump into the right companies. From my experience, the strategic part is to wait until warrants expire. Most SPACs have very, very positive investor p…

I'm a small-time retail amateur and consider myself conservative with my portfolio (I stock-pick so that may be generous) so take this with a spoonful of salt. But to me, by buying in SPACs, or IPOs for that matter, one is trying to play VC's game. You're buying companies who have yet to prove their business model, who are likely far off from actual profitability - earnings before everything else (EBITDA) doesn't cou…

> My style is more akin to buying proven cash-cows at reasonable-ish valuations

if it was so proven, the current valuation would not fall far from the NPV via some sort of discount cashflow analysis. It's still possible to get a good deal, but just as difficult, as only an unexpected growth can give you the returns you want.

Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#37

Post by fisherjeff »

I mean, I don’t think this is particularly worse than any other deal. Investment bankers, institutional investors, etc., effectively take a cut of every other deal so why should a SPAC be any different?

It’s a big cut, relatively speaking, but there’s also potentially a good amount of risk. And although lately it seems like there hasn’t been much risk in SPACs and the sponsors have been doing very well, investment bankers have been doing very well too!

Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#38

Post by kennethh »

stillicidious wrote: post #18

Thorough study from a year ago for interested folk: https://corpgov.law.harvard.edu/2020/11/19/a-sober-look-at-s...

Very interesting read, SPACs seems like a very bad deal in most cases. Also found this article which tells much the same story but with better graphics: https://financescp.net/2020/12/18/spac-mania-2020-no-free-lu...

Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#39

Post by b9a2cab5 »

Glyptodon wrote: post #12

Why isn't there a race to the bottom to shrink the sponsor cut from 20% to 5% or something? If being the sponsor is as protected and lucrative as suggested surely plenty of people would be willing to sponsor for less of a cut, which in turn would make the deal less of a bad deal for others?

There is an abundance of capital chasing ever diminishing returns. I think it's at least somewhat likely there is little price elasticity on the sponsor cut and almost certainly a lot of retail investors who are irrational investing in these SPACs.

Re: The Great SPAC Scam: SPACs a Great Deal for Sponsors, but Not Others

#40

Post by trophycase »

neilarmstonk wrote: post #11
cl42 wrote: post #4

For those investing in public equities: I personally believe some SPACs are definitely worth it in the long run. SPACs suffering on the public markets are a great opportunity to make long-term investments if you are very, very careful and wait a bit longer than most to jump into the right companies. From my experience, the strategic part is to wait until warrants expire. Most SPACs have very, very positive investor p…

Perhaps overly cynical but my take is that there’s little relationship between fundamentals and valuations of “exciting” public companies at the moment, and so acting on any grand theory about underlying value is acting in the face of an unfortunate reality: you could be right… and still lose money. You can find example after example of company that is either vastly overvalued, or vastly undervalued, according to any…

Is that why the most profitable companies are also the most valuable?
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